UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the Fiscal Year Ended December 31, 2005
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d.) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transaction period from _______ to _______
COMMISSION FILE NUMBER: 23601
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PATHFINDER BANCORP, INC.
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(Exact Name of Registrant as Specified in its Charter)
FEDERAL 16-1540137
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State or Other Jurisdiction of (I.R.S.
Incorporation or Organization) Employer Identification Number)
214 West First Street, Oswego, NY 13126
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(Address of Principal Executive Office) (Zip Code)
(315) 343-0057
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(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes [ ] No [X].
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X].
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of March 15, 2006 there were 2,950,419 shares issued and 2,463,132
shares outstanding of the Registrant's Common Stock.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant, computed by reference to the last sale
price on March 15, 2006, as reported by the Nasdaq National Market was
approximately $10,602,711.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Proxy Statement for the 2005 Annual Meeting of Stockholders (Part III).
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2005
PATHFINDER BANCORP, INC.
Page
PART I
Item 1. Description of the Business 1
Item 1A. Risk Factors 9
Item 1B. Unresolved Staff Comments 11
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder 13
Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 33
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure 68
Item 9A. Controls and Procedures 68
Item 9B. Other Information 68
PART III
Item 10. Directors and Executive Officers of the Registrant 68
Item 11. Executive Compensation 69
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 69
Item 13. Certain Relationships and Related Transactions 69
Item 14. Principal Accountant Fees and Services 69
PART IV
Item 15. Exhibits and Financial Statement Schedules 70
PART I
ITEM 1: BUSINESS
GENERAL
PATHFINDER BANCORP, INC.
Pathfinder Bancorp, Inc. (the "Company") is a Federally chartered mid-tier
holding company headquartered in Oswego, New York. The primary business of the
Company is its investment in Pathfinder Bank (the "Bank") and Pathfinder
Statutory Trust I. The Company is majority owned by Pathfinder Bancorp, M.H.C.,
a federally-chartered mutual holding company (the "Mutual Holding Company").
At December 31, 2005, the Mutual Holding Company held 1,583,239 shares of Common
Stock and the public held 879,893 shares of Common Stock (the "Minority
Shareholders"). At December 31, 2005, Pathfinder Bancorp, Inc. had total assets
of $296.9 million, total deposits of $236.4 million and shareholders' equity of
$20.9 million.
The Company's executive office is located at 214 West First Street, Oswego, New
York and the telephone number at that address is (315) 343-0057.
PATHFINDER BANK
The Bank is a New York-chartered savings bank headquartered in Oswego, New York.
The Bank operates from its main office as well as six full-service offices
located in its market area consisting of Oswego County and the contiguous
counties. The Bank's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank was chartered as a New York savings bank in 1859
as Oswego City Savings Bank. The Bank is a consumer-oriented institution
dedicated to providing mortgage loans and other traditional financial services
to its customers. The Bank is committed to meeting the financial needs of its
customers in Oswego County, New York, the county in which it operates.
The Bank is primarily engaged in the business of attracting deposits from the
general public in the Bank's market area, and investing such deposits, together
with other sources of funds, in loans secured by one- to four-family residential
real estate and commercial real estate. At December 31, 2005, $150.9 million,
or 80% of the Bank's total loan portfolio consisted of loans secured by real
estate, of which $119.1 million, or 64%, were loans secured by one- to
four-family residences and $31.8 million, or 17%, were secured by commercial
real estate. Additionally, $16.3 million, or 11%, of total real estate loans,
were secured by second liens on residential properties that are classified as
consumer loans. The Bank also originates commercial and consumer loans that
totaled $18.3 and $3.4 million, respectively, or 12%, of the Bank's total loan
portfolio. The Bank invests a portion of its assets in securities issued by the
United States Government agencies and sponsored enterprises, state and municipal
obligations, corporate debt securities, mutual funds, and equity securities.
The Bank also invests in mortgage-backed securities primarily issued or
guaranteed by United States Government sponsored enterprises. The Bank's
principal sources of funds are deposits, principal and interest payments on
loans and borrowings from correspondent financial institutions. The principal
source of income is interest on loans and investment securities. The Bank's
principal expenses are interest paid on deposits, and employee compensation and
benefits.
The Bank's executive office is located at 214 West First Street, Oswego, New
York, and its telephone number at that address is (315) 343-0057.
Pathfinder Bank formed a limited purpose commercial bank subsidiary, Pathfinder
Commercial Bank, in October of 2002. Pathfinder Commercial Bank was established
to serve the depository needs of public entities in its market area.
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In April 1999, the Bank established Pathfinder REIT, Inc. as the Bank's
wholly-owned real estate investment trust subsidiary. At December 31, 2005,
Pathfinder REIT, Inc. held $23.7 million in mortgages and mortgage related
assets. Recent legislation proposed by the New York State legislature would
eliminate the tax treatment accorded REITs. Enactment of this legislation would
increase the state tax rate for the Company. All disclosures in the Form 10-K
relating to the Bank's loans and investments include loans and investments that
are held by Pathfinder REIT, Inc.
The Bank also has 100% ownership in Whispering Oaks Development Corp., which was
originally formed to develop the Whispering Oaks real estate subdivision in
Baldwinsville, New York. The Bank gained titled to the Whispering Oaks real
estate subdivision through foreclosure. The Whispering Oaks real estate
subdivision has been fully developed. The subsidiary is retained, however, in
case the need to operate or develop other foreclosed real estate emerges.
MARKET AREA AND COMPETITION
The economy in the Bank's market area is manufacturing-oriented and is also
significantly dependent upon the State University of New York College at Oswego.
The major manufacturing employers in the Bank's market area are Entergy Nuclear
Northeast, Novelis, Constellation, NRG and Huhtamaki. The Bank is the second
largest financial institution headquartered in Oswego County. However, the Bank
encounters competition from a variety of sources. The Bank's business and
operating results are significantly affected by the general economic conditions
prevalent in its market areas.
The Bank encounters strong competition both in attracting deposits and in
originating real estate and other loans. Its most direct competition for
deposits has historically come from commercial and savings banks, savings
associations and credit unions in its market area. Competition for loans comes
from such financial institutions as well as mortgage banking companies. The
Bank expects continued strong competition in the foreseeable future, including
increased competition from "super-regional" banks entering the market by
purchasing large commercial banks and savings banks. Many such institutions
have greater financial and marketing resources available to them than does the
Bank. The Bank competes for savings deposits by offering depositors a high
level of personal service and a wide range of competitively priced financial
services. The Bank competes for real estate loans primarily through the
interest rates and loan fees it charges and advertising, as well as by
originating and holding in its portfolio mortgage loans which do not necessarily
conform to secondary market underwriting standards.
REGULATION AND SUPERVISION
GENERAL
The Bank is a New York-chartered stock savings bank and its deposit accounts are
insured up to applicable limits by the FDIC through the Bank Insurance Fund
("BIF"). The Bank is subject to extensive regulation by the New York State
Banking Department (the "Department"), as its chartering agency, and by the
FDIC, as its deposit insurer and primary federal regulator. The Bank is
required to file reports with, and is periodically examined by, the FDIC and the
Superintendent of the Department concerning its activities and financial
condition and must obtain regulatory approvals prior to entering into certain
transactions, including, but not limited to, mergers with or acquisitions of
other banking institutions. The Bank is a member of the Federal Home Loan Bank
of New York ("FHLBNY") and is subject to certain regulations by the Federal Home
Loan Bank System. On July 19, 2001 the Company and the Mutual Holding Company
completed their conversion to federal charters. Consequently, they are subject
to regulations of the Office of Thrift Supervision ("OTS") as savings and loan
holding companies. Any change in such regulations, whether by the Department,
the FDIC, or the OTS could have a material adverse impact on the Bank, the
Company or the Mutual Holding Company.
Regulatory requirements applicable to the Bank, the Company and the Mutual
Holding Company are referred to below or elsewhere herein.
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NEW YORK BANK REGULATION
The exercise by an FDIC-insured savings bank of the lending and investment
powers under the New York State Banking Law is limited by FDIC regulations and
other federal law and regulations. In particular, the applicable provisions of
New York State Banking Law and regulations governing the investment authority
and activities of an FDIC insured state-chartered savings bank have been
substantially limited by the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") and the FDIC regulations issued pursuant thereto.
The Bank derives its lending, investment and other authority primarily from the
applicable provisions of New York State Banking Law and the regulations of the
Department, as limited by FDIC regulations. Under these laws and regulations,
savings banks, including the Bank, may invest in real estate mortgages, consumer
and commercial loans, certain types of debt securities, including certain
corporate debt securities and obligations of federal, state and local
governments and agencies, certain types of corporate equity securities and
certain other assets. New York State chartered savings banks may also invest in
subsidiaries under their service corporation investment authority. A savings
bank may use this power to invest in corporations that engage in various
activities authorized for savings banks, plus any additional activities, which
may be authorized by the Banking Board. Under FDICIA and the FDIC's
implementing regulations, the Bank's investment and service corporation
activities are limited to activities permissible for a national bank unless the
FDIC otherwise permits it.
The FDIC and the Superintendent have broad enforcement authority over the Bank.
Under this authority, the FDIC and the Superintendent have the ability to issue
formal or informal orders to correct violations of law or unsafe or unsound
banking practices.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank is a member of the BIF, which is administered by the FDIC. Deposits
are insured up to applicable limits by the FDIC and such insurance is backed by
the full faith and credit of the U.S. Government.
On February 15, 2006, federal legislation to reform federal deposit insurance
was signed into law. This law requires, among other things, the merger of the
Savings Association Insurance Fund and the Bank Insurance Fund into a unified
insurance deposit fund, an increase in the amount of federal deposit insurance
coverage from $100,000 to $130,000 (with a cost of living adjustment to become
effective in five years), and the reserve ratio to be modified to provide for a
range between 1.15% and 1.50% of estimated insured deposits. The law requires
the FDIC to issue implementing regulations and the changes required by the law
will not become effective until final regulations have been issued, which must
be no later than 270 days from February 15, 2006.
REGULATORY CAPITAL REQUIREMENTS
The FDIC has adopted risk-based capital guidelines to which the Bank is subject.
The guidelines establish a systematic analytical framework that makes regulatory
capital requirements more sensitive to differences in risk profiles among
banking organizations. The Bank is required to maintain certain levels of
regulatory capital in relation to regulatory risk-weighted assets. The ratio of
such regulatory capital to regulatory risk-weighted assets is referred to as the
Bank's "risk-based capital ratio." Risk-based capital ratios are determined by
allocating assets and specified off-balance sheet items to four risk-weighted
categories ranging from 0% to 100%, with higher levels of capital being required
for the categories perceived as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The first tier
("Tier I") includes common equity, retained earnings, certain non-cumulative
perpetual preferred stock (excluding auction rate issues) and minority interests
in equity accounts of consolidated subsidiaries, less goodwill and other
intangible assets (except mortgage servicing rights and purchased credit card
relationships subject to certain limitations). Supplementary ("Tier II") capital
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includes, among other items, cumulative perpetual and long-term limited-life
preferred stock, mandatory convertible securities, certain hybrid capital
instruments, term subordinated debt and the allowance for loan and lease losses,
subject to certain limitations, less required deductions. Savings banks are
required to maintain a total risk-based capital ratio of at least 8%, of which
at least 4% must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum Tier I
leverage ratio (Tier I capital to adjusted total assets as specified in the
regulations). These regulations provide for a minimum Tier I leverage ratio of
3% for banks that meet certain specified criteria, including that they have the
highest examination rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier I leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points. The FDIC and
the other federal banking regulators have proposed amendments to their minimum
capital regulations to provide that the minimum leverage capital ratio for a
depository institution that has been assigned the highest composite rating of 1
under the Uniform Financial Institutions Rating System will be 3% and that the
minimum leverage capital ratio for any other depository institution will be 4%
unless a higher leverage capital ratio is warranted by the particular
circumstances or risk profile of the depository institution. The FDIC may,
however, set higher leverage and risk-based capital requirements on individual
institutions when particular circumstances warrant. Savings banks experiencing
or anticipating significant growth are expected to maintain capital ratios,
including tangible capital positions, well above the minimum levels.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
The FDIC has the authority to use its enforcement powers to prohibit a savings
bank from paying dividends if, in its opinion, the payment of dividends would
constitute an unsafe or unsound practice. Federal law also prohibits the
payment of dividends by a bank that will result in the bank failing to meet its
applicable capital requirements on a pro forma basis. New York law also
restricts the Bank from declaring a dividend which would reduce its capital
below (i) the amount required to be maintained by state law and regulation, or
(ii) the amount of the Bank's liquidation account established in connection with
the reorganization undertook in 1997.
PROMPT CORRECTIVE ACTION
The federal banking agencies have promulgated regulations to implement the
system of prompt corrective action required by federal law. Under the
regulations, a bank shall be deemed to be (i) "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio of
6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any written capital order or directive; (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized"; (iii) "undercapitalized" if it has a total risk-based
capital ratio that is lessthan 8.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is
less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%. Federal law
and regulations also specify circumstances under which a federal banking agency
may reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution to comply with supervisory actions
as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
Based on the foregoing, the Bank currently meets the criteria to be classified
as a "well capitalized" savings institution.
TRANSACTIONS WITH AFFILIATES AND INSIDERS
Under current federal law, transactions between depository institutions and
their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act
and its implementing regulations. An affiliate of a savings bank is any company
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or entity that controls, is controlled by, or is under common control with the
savings bank, other than a subsidiary of the savings bank. In a holding company
context, at a minimum, the parent holding company of a savings bank and any
companies which are controlled by such parent holding company are affiliates of
the savings bank. Generally, Section 23A limits the extent to which the savings
bank or its subsidiaries may engage in "covered transactions" with any one
affiliate to an amount equal to 10% of such savings bank's capital stock and
surplus and contains an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus. The term
"covered transaction" includes the making of loans or other extensions of credit
to an affiliate; the purchase of assets from an affiliate, the purchase of, or
an investment in, the securities of an affiliate; the acceptance of securities
of an affiliate as collateral for a loan or extension of credit to any person;
or issuance of a guarantee, acceptance, or letter of credit on behalf of an
affiliate. Section 23A also establishes specific collateral requirements for
loans or extensions of credit to, or guarantees, acceptances on letters of
credit issued on behalf of an affiliate. Section 23B requires that covered
transactions and a broad list of other specified transactions be on terms
substantially the same, or no less favorable, to the savings bank or its
subsidiary as similar transactions with nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act and its implementing
regulations restrict a savings bank with respect to loans to directors,
executive officers, and principal stockholders. Under Section 22(h), loans to
directors, executive officers and stockholders who control, directly or
indirectly, 10% or more of voting securities of a savings bank and certain
related interests of any of the foregoing, may not exceed, together with all
other outstanding loans to such persons and affiliated entities, the savings
bank's total capital and surplus. Section 22(h) also prohibits loans above
amounts prescribed by the appropriate federal banking agency to directors,
executive officers, and stockholders who control 10% or more of voting
securities of a stock savings bank, and their respective related interests,
unless such loan is approved in advance by a majority of the board of directors
of the savings bank. Any "interested" director may not participate in the
voting. The loan amount (which includes all other outstanding loans to such
person) as to which such prior board of director approval is required, is the
greater of $25,000 or 5% of capital and surplus or any loans over $500,000.
Further, pursuant to Section 22(h), loans to directors, executive officers and
principal stockholders must generally be made on terms substantially the same as
offered in comparable transactions to other persons. Section 22(g) of the
Federal Reserve Act places additional limitations on loans to executive
officers.
FEDERAL HOLDING COMPANY REGULATION
GENERAL. The Company and the Mutual Holding Company are nondiversified mutual
savings and loan holding companies within the meaning of the Home Owners' Loan
Act. The Company and the Mutual Holding Company are registered with the OTS and
are subject to OTS regulations, examinations, supervision and reporting
requirements. As such, the OTS has enforcement authority over the Company and
the Mutual Holding Company, and their non-savings institution subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution.
PERMITTED ACTIVITIES. Under OTS regulation and policy, a mutual holding company
and a federally chartered mid-tier holding company, such as the Company, may
engage in the following activities: (i) investing in the stock of a savings
association; (ii) acquiring a mutual association through the merger of such
association into a savings association subsidiary of such holding company or an
interim savings association subsidiary of such holding company; (iii) merging
with or acquiring another holding company, one of whose subsidiaries is a
savings association; (iv) investing in a corporation, the capital stock of which
is available for purchase by a savings association under federal law or under
the law of any state where the subsidiary savings association or associations
share their home offices; (v) furnishing or performing management services for a
savings association subsidiary of such company; (vi) holding, managing or
liquidating assets owned or acquired from a savings subsidiary of such company;
(vii) holding or managing properties used or occupied by a savings association
subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix)
any other activity (A) that the Federal Reserve Board, by regulation, has
determined to be permissible for bank holding companies under Section 4(c) of
the Bank Holding Company Act of 1956, unless the Director of the OTS, by
regulation, prohibits or limits any such activity for savings and loan holding
companies; or (B) in which multiple savings and loan holding companies were
authorized (by regulation) to directly engage on March 5, 1987; (x) any activity
permissible for financial holding companies under Section 4(k) of the Bank
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Holding Company Act, including securities and insurance underwriting; and (xi)
purchasing, holding, or disposing of stock acquired in connection with a
qualified stock issuance if the purchase of such stock by such savings and loan
holding company is approved by the Director. If a mutual holding company
acquires or merges with another holding company, the holding company acquired or
the holding company resulting from such merger or acquisition may only invest in
assets and engage in activities listed in (i) through (xi) above, and has a
period of two years to cease any nonconforming activities and divest of any
nonconforming investments.
The Home Owners' Loan Act prohibits a savings and loan holding company, directly
or indirectly, or through one or more subsidiaries, from acquiring another
savings association or holding company thereof, without prior written approval
of the OTS. It also prohibits the acquisition or retention of, with certain
exceptions, more than 5% of a nonsubsidiary savings association, a nonsubsidiary
holding company, or a nonsubsidiary company engaged in activities other than
those permitted by the Home Owners' Loan Act; or acquiring or retaining control
of an institution that is not federally insured. In evaluating applications by
holding companies to acquire savings associations, the OTS must consider the
financial and managerial resources, future prospects of the company and
association involved, the effect of the acquisition on the risk to the insurance
fund, the convenience and needs of the community and competitive factors.
The Office of Thrift Supervision is prohibited from approving any acquisition
that would result in a multiple savings and loan holding company controlling
savings associations in more than one state, subject to two exceptions: (i) the
approval of interstate supervisory acquisitions by savings and loan holding
companies, and (ii) the acquisition of a savings institution in another state if
the laws of the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
WAIVERS OF DIVIDENDS BY MUTUAL HOLDING COMPANY. Office of Thrift Supervision
regulations require the Mutual Holding Company to notify the OTS of any proposed
waiver of its receipt of dividends from the Company
CONVERSION OF THE MUTUAL HOLDING COMPANY TO STOCK FORM. OTS regulations permit
the Mutual Holding Company to convert from the mutual form of organization to
the capital stock form of organization (a "Conversion Transaction"). There can
be no assurance when, if ever, a Conversion Transaction will occur, and the
Board of Directors has no current intention or plan to undertake a Conversion
Transaction. In a Conversion Transaction a new holding company would be formed
as the successor to the Company (the "New Holding Company"), the Mutual Holding
Company's corporate existence would end, and certain depositors of the Bank
would receive the right to subscribe for additional shares of the New Holding
Company. In a Conversion Transaction, each share of common stock held by
stockholders other than the Mutual Holding Company ("Minority Stockholders")
would be automatically converted into a number of shares of common stock of the
New Holding Company determined pursuant an exchange ratio that ensures that
Minority Stockholders own the same percentage of common stock in the New Holding
Company as they owned in the Company immediately prior to the Conversion
Transaction. Under OTS regulations, Minority Stockholders would not be diluted
because of any dividends waived by the Mutual Holding Company (and waived
dividends would not be considered in determining an appropriate exchange ratio),
in the event the Mutual Holding Company converts to stock form. The total
number of shares held by Minority Stockholders after a Conversion Transaction
also would be increased by any purchases by Minority Stockholders in the stock
offering conducted as part of the Conversion Transaction.
NEW YORK STATE BANK HOLDING COMPANY REGULATION
In addition to the federal regulation, a holding company controlling a state
chartered savings bank organized or doing business in New York State also may be
subject to regulation under the New York State Banking Law. The term "bank
holding company," for the purposes of the New York State Banking Law, is defined
generally to include any person, company or trust that directly or indirectly
either controls the election of a majority of the directors or owns, controls or
holds with power to vote more than 10% of the voting stock of a bank holding
company or, if the Company is a banking institution, another banking
institution, or 10% or more of the voting stock of each of two or more banking
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institutions. In general, a bank holding company controlling, directly or
indirectly, only one banking institution will not be deemed to be a bank holding
company for the purposes of the New York State Banking Law. As such, neither
the Company nor the Mutual Holding Company is subject to supervision by the
Department.
FEDERAL SECURITIES LAW
The common stock of the Company is registered with the SEC under the Exchange
Act. The Company is subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the SEC under the Exchange Act.
The Company Common Stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their transaction
accounts (primarily checking, money management and NOW checking accounts). At
December 31, 2005, the Bank was in compliance with these reserve requirements.
FEDERAL COMMUNITY REINVESTMENT REGULATION
Under the Community Reinvestment Act, as amended (the "CRA"), as implemented by
FDIC regulations, a savings bank has a continuing and affirmative obligation,
consistent with its safe and sound operation, to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the FDIC, in connection
with its examination of a savings institution, to assess the institution's
record of meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications by such institution. The CRA
requires the FDIC to provide a written evaluation of an institution's CRA
performance utilizing a four-tiered descriptive rating system. The Bank's
latest CRA rating was "outstanding."
NEW YORK STATE COMMUNITY REINVESTMENT REGULATION
The Bank is also subject to provisions of the New York State Banking Law which
impose continuing and affirmative obligations upon banking institutions
organized in New York State to serve the credit needs of its local community
("NYCRA") which are substantially similar to those imposed by the CRA. Pursuant
to the NYCRA, a bank must file an annual NYCRA report and copies of all federal
CRA reports with the Department. The NYCRA requires the Department to make a
biennial written assessment of a bank's compliance with the NYCRA, utilizing a
four-tiered rating system and make such assessment available to the public. The
NYCRA also requires the Superintendent to consider a bank's NYCRA rating when
reviewing a bank's application to engage in certain transactions, including
mergers, asset purchases and the establishment of branch offices or automated
teller machines, and provides that such assessment may serve as a basis for the
denial of any such application.
The Bank's NYCRA rating as of its latest examination was "satisfactory."
THE USA PATRIOT ACT
The USA PATRIOT Act was signed into law on October 26, 2001. The USA PATRIOT
Act gives the federal government new powers to address terrorist threats through
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enhanced domestic security measures, expanded surveillance powers, increased
information sharing and broadened anti-money laundering requirements. The USA
PATRIOT Act also requires the federal banking agencies to take into
consideration the effectiveness of controls designed to combat money laundering
activities in determining whether to approve a merger or other acquisition
application of a member institution. Accordingly, if the Company were to engage
in a merger or other acquisitions, its controls designed to combat money
laundering would be considered as part of the application process. The Company
and the Bank have established policies, procedures and systems designed to
comply with these regulations.
SARBANES-OXLEY ACT OF 2002
The Sarbanes-Oxley Act of 2002 was signed into law on July 30, 2002. The
Sarbanes-Oxley Act of 2002 is a law that addresses, among other issues,
corporate governance, auditing and accounting, executive compensation, and
enhanced and timely disclosure of corporate information. As directed by Section
302(a) of Sarbanes-Oxley Act of 2002, the Company Chief Executive Officers and
Chief Financial Officer are each required to certify that the company's
quarterly and annual reports do not contain any untrue statement of a material
fact. The rules have several requirements, including having these officers
certify that: they are responsible for establishing, maintaining and regularly
evaluating the effectiveness of our internal controls; they have made certain
disclosures to our auditors and the audit committee of the Board of Directors
about our internal controls; and they have included information in our quarterly
and annual reports about their evaluation and whether there have been
significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to the evaluation. We will be
subject to further reporting and audit requirements with the year ending
December 31, 2007 under the requirements of Sarbanes-Oxley. We have existing
policies, procedures and systems designed to comply with these regulations, and
are further enhancing and documenting such policies, procedures and systems to
ensure continued compliance with these regulations.
The company maintains an Internet website located at WWW.PATHFINDERBANK.COM on
which, among other things, the Company makes available, free of charge, various
reports that it files with or furnishes to the Securities and Exchange
Commission, including its Annual Report on Form 10-K, quarterly reports on Form
10-Q, and current reports on Form 8-K. The Company has also made available on
its website its Audit Committee Charter, Governance Guidelines and Code of
Ethics. These reports are made available as soon as reasonably practicable
after these reports are filed with or furnished to the Securities and Exchange
Commission.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
The following discussion of federal taxation is intended only to summarize
certain pertinent federal income tax matters and is not a comprehensive
description of the tax rules applicable to the Company or the Bank.
BAD DEBT RESERVES. Prior to the 1996 Act, the Bank was permitted to establish a
reserve for bad debts and to make annual additions to the reserve. These
additions could, within specified formula limits, be deducted in arriving at the
Bank's taxable income. As a result of the 1996 Act, the Bank must use the small
bank experience method in computing its bad debt deduction beginning with its
1996 Federal tax return.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the 1996 Act, bad debt reserves
created prior to January 1, 1988 were subject to recapture into taxable income
should the Bank fail to meet certain thrift asset and definitionaltests. New
federal legislation eliminated these thrift related recapture rules. However,
under current law, pre-1988 reserves remain subject to recapture should the Bank
cease to retain a bank or thrift charter or make certain non-dividend
distributions.
MINIMUM TAX. The Internal Revenue Code imposes an alternative minimum tax
("AMT") at a rate of 20% on a base of regular taxable income plus certain tax
preferences ("alternative minimum taxable income" or "AMTI"). The AMT is
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payable to the extent such AMTI is in excess of an exemption amount. Net
operating losses can offset no more than 90% of AMTI. Certain payments of
alternative minimum tax may be used as credits against regular tax liabilities
in future years.
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 5, 1997.
The Internal Revenue Service has examined the federal income tax return for the
fiscal year ended 1992; the New York State fiscal year-end tax returns for 1998
through 1999 are currently under examination by the New York State Department of
Taxation and Finance. See Note 13 to the Financial Statements.
STATE TAXATION
NEW YORK TAXATION. The Bank is subject to the New York State Franchise Tax on
Banking Corporations in an annual amount equal to the greater of (i) 8.0% of the
Bank's "entire net income" allocable to New York State during the taxable year,
or (ii) the applicable alternative minimum tax. The alternative minimum tax is
generally the greater of (a) 0.01% of the value of the Bank's assets allocable
to New York State with certain modifications, (b) 3% of the Bank's "alternative
entire net income" allocable to New York State, or (c) $250. Entire net income
is similar to federal taxable income, subject to certain modifications and
alternative entire net income is equal to entire net income without certain
modifications. Net operating losses arising in the current period can be
carried forward to the succeeding 20 taxable years.
The Company's Annual Report on Form 10-K may be accessed on the Company's
website at WWW.PATHFINDERBANK.COM.
ITEM 1A: RISK FACTORS
The material risks and uncertainties that management believes affect the Company
are described below. The risks and uncertainties described below are not the
only ones facing the Company. Additional risks and uncertainties that management
is not aware of or that management currently deems immaterial may also impair
the Company's business operations. This report is qualified in its entirety by
these risk factors. If any of the following risks actually occur, the Company's
financial condition and results of operations could be materially and adversely
affected.
CHANGES IN INTEREST RATES CAN HAVE AN ADVERSE EFFECT ON PROFITABILITY
The Company's earnings and cash flows are largely dependent upon its net
interest income. Net interest income is the difference between interest income
earned on interest earning assets such as loans and investment securities and
interest expense paid on interest bearing liabilities such as deposits and
borrowed funds. Interest rates are highly sensitive to many factors that are
beyond the Company's control, including general economic conditions,
competition, and policies of various governmental and regulatory agencies and,
in particular, the Board of Governors of the Federal Reserve System. Changes in
monetary policy, including changes in interest rates, could influence not only
the interest the Company receives on loans and investment securities and the
amount of interest it pays on deposits and borrowings, but such changes could
also affect (i) the Company's ability to originate loans and obtain deposits,
(ii) the fair value of the Company's financial assets and liabilities, and (iii)
the average duration of the Company's assets and liabilities. If the interest
rates paid on deposits and other borrowings increase at a faster rate than the
interest rates received on loans and other investments, the Company's net
interest income, and therefore earnings, could be adversely affected. Earnings
could also be adversely affected if the interest rates received on loans and
other investments fall more quickly than the interest rates paid on deposits and
other borrowings.
Although management believes it has implemented effective asset and
liability management strategies to reduce the potential effects of changes in
interest rates on the Company's results of operations, any substantial,
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unexpected, prolonged change in market interest rates could have a material
adverse effect on the Company's financial condition and results of operations.
See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk"
located elsewhere in this report for further discussion related to the Company's
management of interest rate risk.
ALLOWANCE FOR LOAN LOSSES MAY BE INSUFFICIENT
The Company's loan customers may not repay their loans according to their terms
and the collateral securing the payment of these loans may be insufficient to
assure repayment. The Company may experience significant loan losses, which
would have a material adverse effect on earnings. Management makes various
assumptions and judgments about the collectibility of the loan portfolio,
including the creditworthiness of borrowers and the value of the real estate and
other assets serving as collateral for the repayment of loans.
The Company maintains an allowance for loan losses in an attempt to cover any
loan losses inherent in the portfolio. In determining the size of the allowance,
management relies on an analysis of the loan portfolio based on historical loss
experience, volume and types of loans, trends in classification, volume and
trends in delinquencies and non-accruals, national and local economic conditions
and other pertinent information. If those assumptions are incorrect, the
allowance may not be sufficient to cover future loan losses and adjustments may
be necessary to allow for different economic conditions or adverse developments
in the loan portfolio. In addition, regulatory agencies review the Company's
allowance for loan losses and may require additions to the allowance based on
their judgment about information available to them at the time of their
examination. An increase in the Company's allowance for loan losses could reduce
its earnings.
EXTENSIVE REGULATION AND SUPERVISION
The Company, primarily through its principal subsidiaries Pathfinder Bank and
Pathfinder Commercial Bank and certain non-bank subsidiaries, is subject to
extensive federal and state regulation and supervision. Banking regulations are
primarily intended to protect depositors' funds, federal deposit insurance funds
and the banking system as a whole, not shareholders. These regulations affect
the Company's lending practices, capital structure, investment practices,
dividend policy and growth, among other things. The Company is also subject to a
number of federal laws, which, among other things, require it to lend to various
sectors of the economy and population, and establish and maintain comprehensive
programs relating to anti-money laundering and customer identification. Congress
and federal regulatory agencies continually review banking laws, regulations and
policies for possible changes. Changes to statutes, regulations or regulatory
policies, including changes in interpretation or implementation of statutes,
regulations or policies, could affect the Company in substantial and
unpredictable ways. Such changes could subject the Company to additional costs,
limit the types of financial services and products it may offer and/or increase
the ability of non-banks to offer competing financial services and products,
among other things. Failure to comply with laws, regulations or policies could
result in sanctions by regulatory agencies, civil money penalties and/or
reputation damage, which could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's
compliance with certain of these laws will be considered by banking regulators
when reviewing bank merger and bank holding company acquisitions. While the
Company has policies and procedures designed to prevent any such violations,
there can be no assurance that such violations will not occur. See the
"Regulation and Supervision" section in Item 1, "Business" and Note 17 to
consolidated financial statements included in Item 8, "Financial Statements and
Supplementary Data", which are located elsewhere in this report.
LOCAL MARKET ECONOMIES
The Company's business is concentrated in Oswego and parts of Onondaga counties
of New York State. The economy in the Company's market area is
manufacturing-oriented and dependent on the State University of New York College
at Oswego. As a result, its financial condition, results of operations and cash
flows are subject to changes if there are changes in the economic conditions in
these areas. A prolonged period of economic recession or other adverse economic
conditions in one or both of these areas could have a negative impact on the
Company. The Company can provide no assurance that conditions in its market area
economies will not deteriorate in the future and that such deterioration would
not have a material adverse effect on the Company.
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COMPETITION IN THE FINANCIAL SERVICES INDUSTRY
The Company faces substantial competition in all areas of its operations from a
variety of different competitors, many of which are larger and may have more
financial resources. The Company competes with other providers of financial
services such as other bank holding companies, commercial and savings banks,
savings and loan associations, credit unions, money market and mutual funds,
mortgage companies, title agencies, asset managers, insurance companies and a
growing list of other local, regional and national institutions which offer
financial services. If the Company is unable to compete effectively, it will
lose market share and income generated from loans, deposits, and other financial
products will decline.
ITEM 1B: UNRESOLVED STAFF COMMENTS
None
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ITEM 2: PROPERTIES
The Bank conducts its business through its main office located in Oswego, New
York, and six full service branch offices located in Oswego County. The
following table sets forth certain information concerning the main office and
each branch office of the Bank at December 31, 2005. The aggregate net book
value of the Bank's premises and equipment was $8.0 million at December 31,
2005. For additional information regarding the Bank's properties, see Note 7 to
Notes to Financial Statements
LOCATION OPENING DATE OWNED/LEASED
--------------------------------------------------------------------------------
Main Office 1874 Owned
214 West First Street
Oswego, New York 13126
Plaza Branch 1989 Owned (1)
Route 104, Ames Plaza
Oswego, New York 13126
Mexico Branch 1978 Owned
Norman & Main Streets
Mexico, New York 13114
Oswego East Branch 1994 Owned
34 East Bridge Street
Oswego, New York 13126
Lacona Branch 2002 Owned
1897 Harwood Drive
Lacona, New York 13083
Fulton Branch 2003 Owned (2)
5 West First Street South
Fulton, New York 13069
Central Square Branch 2005 Owned
3025 East Ave
Central Square, New York 13036
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(1) The building is owned; the underlying land is leased with an annual
rent of $19,000
(2) The building is owned; the underlying land is leased
with an annual rent of $23,000
ITEM 3: LEGAL PROCEEDINGS
There are various claims and lawsuits to which the Company is periodically
involved incident to the Company's business. In the opinion of management such
claims and lawsuits in the aggregate are not expected to have a material adverse
impact on the Company's consolidated financial condition and results of
operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal 2005 to a vote of
the Company's shareholders.
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PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON STOCK, RELATED SECURITY HOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Pathfinder Bancorp, Inc.'s common stock currently trades on the Nasdaq SmallCap
market under the symbol "PBHC". There were 415 shareholders of record as of
March 3, 2006. The following table sets forth the high and low closing bid
prices and dividends paid per share of common stock for the periods indicated:
DIVIDEND
QUARTER ENDED: HIGH LOW PAID
-----------------------------------------------
December 31, 2005 $15.050 $12.360 $ 0.1025
September 30, 2005 15.250 13.050 0.1025
June 30, 2005 18.000 14.250 0.1025
March 31, 2005 17.950 16.250 0.1025
-----------------------------------------------
December 31, 2004 $18.500 $16.250 $ 0.1025
September 30, 2004 16.630 14.770 0.1025
June 30, 2004 19.070 15.050 0.100
March 31, 2004 20.999 17.010 0.100
-----------------------------------------------
DIVIDENDS AND DIVIDEND HISTORY
The Company has historically paid regular quarterly cash dividends on its common
stock, and the Board of Directors presently intends to continue the payment of
regular quarterly cash dividends, subject to the need for those funds for debt
service and other purposes. Payment of dividends on the common stock is subject
to determination and declaration by the Board of Directors and will depend upon
a number of factors, including capital requirements, regulatory limitations on
the payment of dividends, Pathfinder Bank and its subsidiaries results of
operations and financial condition, tax considerations, and general economic
conditions. The Company's mutual holding company, Pathfinder Bancorp, M.H.C.,
may elect to waive or receive dividends each time the Company declares a
dividend. The election to waive the dividend receipt requires prior
non-objection of the Office of Thrift Supervision. Pathfinder Bancorp, M.H.C.
elected to waive its dividend for the quarters ended March 31, 2005 and
September 30, 2005. During 2006, Pathfinder Bancorp, M.H.C. expects to waive
two quarterly dividends.
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ITEM 6: SELECTED FINANCIAL DATA
Pathfinder Bancorp, Inc. ("the Company") is the parent company of Pathfinder
Bank and Pathfinder Statutory Trust I. Pathfinder Bank has three operating
subsidiaries - Pathfinder Commercial Bank, Pathfinder REIT Inc., and Whispering
Oaks Development, Inc.
The following selected consolidated financial data sets forth certain financial
highlights of the Company and should be read in conjunction with the
consolidated financial statements and related notes, and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this annual report on Form 10-K.
2005 2004 2003 2002 2001
-----------------------------------------------------------------------------------------------------
YEAR END (In thousands)
Total assets $296,948 $302,037 $277,940 $279,056 $244,514
Loans receivable, net 187,889 185,125 187,002 179,001 162,588
Deposits 236,377 236,672 206,894 204,522 169,589
Equity 20,928 21,826 21,785 23,230 22,185
FOR THE YEAR (In thousands)
Net interest income $ 8,742 $ 8,905 $ 9,337 $ 8,789 $ 7,853
Noninterest income 2,040 3,047 2,608 2,094 1,864
Core noninterest income (a) 2,333 1,996 1,740 1,511 1,355
Noninterest expense 10,060 9,307 9,094 7,964 6,863
Net income 462 1,405 1,652 1,156 1,602
PER SHARE
Net income (basic) $ 0.19 $ 0.58 $ 0.68 $ 0.45 $ 0.62
Book value 8.50 8.91 8.96 8.90 8.64
Tangible book value (b) 6.77 7.04 7.03 7.02 7.63
Cash dividends declared 0.410 0.405 0.40 0.30 0.26
RATIOS
Return on average assets 0.15% 0.47% 0.59% 0.45% 0.68%
Return on average equity 2.16 6.45 7.61 5.01 7.34
Return on average tangible equity (b) 2.72 8.17 9.77 7.03 8.29
Average equity to average assets 6.95 7.29 7.77 8.94 9.22
Dividend payout ratio (c) 147.84 47.54 39.41 36.76 28.37
Allowance for loan losses to loans receivable 0.89 0.98 0.91 0.82 1.03
Net interest rate spread 3.07 3.22 3.53 3.47 3.35
Noninterest income to average assets 0.66 1.02 0.93 0.81 0.79
Core noninterest income to average assets (a) 0.76 0.67 0.62 0.59 0.57
Noninterest expense to average assets 3.28 3.12 3.26 3.09 2.90
Efficiency ratio (d) 93.30 77.87 76.13 73.18 70.61
(a) Core noninterest income excludes net (losses) gains on sales and
impairment of investment securities and net (losses) gains on sales of
loans and foreclosed real estate.
(b) Tangible equity excludes intangible assets.
(c) The dividend payout ratio is calculated using dividends declared
and not waived by the Company's mutual holding company parent,
Pathfinder Bancorp, M.H.C., divided by net income.
(d) The efficiency ratio is calculated as noninterest expense divided
by the sum of net interest income and noninterest income.
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Throughout the Management's Discussion and Analysis ("MD&A") the term, "the
Company", refers to the consolidated entity of Pathfinder Bancorp, Inc.
Pathfinder Bank and Pathfinder Statutory Trust I are wholly owned subsidiaries
of Pathfinder Bancorp, Inc., however, Pathfinder Statutory Trust I is
deconsolidated for reporting purposes (see Note 10). Pathfinder Commercial
Bank, Pathfinder REIT, Inc. and Whispering Oaks Development, Inc. represent
wholly owned subsidiaries of Pathfinder Bank. At December 31, 2005, Pathfinder
Bancorp, M.H.C, the Company's mutual holding company parent, whose activities
are not included in the MD&A, held 64.3% of the Company's outstanding common
stock and the public held 35.7%.
When used in this Annual Report the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project" or
similar expression are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market areas and competition, that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake, and specifically declines any obligation, to
publicly release the results of any revisions, which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
The Company's business strategy is to operate as a well-capitalized, profitable
and independent community bank dedicated to providing value-added products and
services to our customers. Generally, the Company has sought to implement this
strategy by emphasizing retail deposits as its primary source of funds and
maintaining a substantial part of its assets in locally-originated residential
first mortgage loans, loans to business enterprises operating in its markets,
and in investment securities. Specifically, the Company's business strategy
incorporates the following elements: (i) operating as an independent
community-oriented financial institution; (ii) maintaining capital in excess of
regulatory requirements; (iii) emphasizing investment in one-to-four family
residential mortgage loans, loans to small businesses and investment securities;
and (iv) maintaining a strong retail deposit base.
The Company's net income is primarily dependent on its net interest income,
which is the difference between interest income earned on its investments in
mortgage and other loans, investment securities and other assets, and its cost
of funds consisting of interest paid on deposits and other borrowings. The
Company's net income also is affected by its provision for loan losses, as well
as by the amount of noninterest income, including income from fees, service
charges and servicing rights, net gains and losses on sales of securities, loans
and foreclosed real estate, and noninterest expense such as employee
compensation and benefits, occupancy and equipment costs, data processing costs
and income taxes. Earnings of the Company also are affected significantly by
general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities, which
events are beyond the control of the Company. In particular, the general level
of market rates tends to be highly cyclical.
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APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States and follow
practices within the banking industry. Application of these principles requires
management to make estimates, assumptions and judgments that affect the amounts
reported in the financial statements and accompanying notes. These estimates,
assumptions and judgments are based on information available as of the date of
the financial statements; accordingly, as this information changes, the
financial statements could reflect different estimates, assumptions and
judgments. Certain policies inherently have a greater reliance on the use of
estimates, assumptions and judgments and as such have a greater possibility of
producing results that could be materially different than originally reported.
Estimates, assumptions and judgments are necessary when assets and liabilities
are required to be recorded at fair value or when an asset or liability needs to
be recorded contingent upon a future event. Carrying assets and liabilities at
fair value inherently results in more financial statement volatility. The fair
values and information used to record valuation adjustments for certain assets
and liabilities are based on quoted market prices or are provided by other
third-party sources, when available. When third party information is not
available, valuation adjustments are estimated in good faith by management.
The most significant accounting policies followed by the Company are presented
in Note 1 to the consolidated financial statements. These policies, along with
the disclosures presented in the other financial statement notes and in this
discussion, provide information on how significant assets and liabilities are
valued in the financial statements and how those values are determined. Based
on the valuation techniques used and the sensitivity of financial statement
amounts to the methods, assumptions and estimates underlying those amounts,
management has identified the determination of the allowance for loan losses to
be the accounting area that requires the most subjective and complex judgments,
and as such could be the most subject to revision as new information becomes
available.
The allowance for loan losses represents management's estimate of probable loan
losses inherent in the loan portfolio. Determining the amount of the allowance
for loan losses is considered a critical accounting estimate because it requires
significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type
on the consolidated balance sheet. Note 1 to the consolidated financial
statements describes the methodology used to determine the allowance for loan
losses, and a discussion of the factors driving changes in the amount of the
allowance for loan losses is included in this report.
The Company carries all of its security investments at fair value with any
unrealized gains or losses reported net of tax as an adjustment to shareholders'
equity. Based on management's assessment, at December 31, 2005, the Company did
not hold any security that had a fair value decline that is currently expected
to be other than temporary. Consequently, any declines in a specific security's
fair value below amortized cost have not been provided for in the income
statement. The Company's ability to fully realize the value of its investment
in various securities, including corporate debt securities, is dependent on the
underlying creditworthiness of the issuing organization.
EXECUTIVE SUMMARY
During 2005, the Company focused on expanding its branch network in Oswego
County by opening a full service branch in Central Square, New York in June of
2005. Total deposits for the new branch at December 31, 2005 were $6.3 million.
Total deposits for the Company remained relatively consistent at $236.4 million
at December 31, 2005 while the average balance of deposits increased $8.1
million to $220.5 million at 2005. The Company will continue to focus on
building its market share in Central Square and developing more core deposit
relationships in its existing markets during 2006.
Total assets decreased 2%, primarily in the investment securities portfolio and
interest-earning deposits. The loan portfolio increased 1% as net growth in the
commercial real estate, commercial and consumer loan portfolios were partially
offset by a decrease in the residential real estate portfolio. Asset quality
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continued to improve during 2006. Nonperforming assets to total assets was
0.81% at December 31, 2005 compared to 0.88% in the prior year. The improvement
in asset quality is attributable to the enhancement of collection procedures and
the resolution through foreclosure and charge-off of two commercial lending
relationships. The Company expects to concentrate on continued commercial
mortgage and commercial loan growth during 2006.
Net income for 2005 was $462,000, or $0.19 per share, as compared to $1.4
million, or $0.58 per share, in 2004. Net interest margin compression; an
impairment charge and strategic losses taken in the investment securities
portfolio; the additional costs of operating a new branch; and personnel
restructuring charges impacted earnings negatively during 2005. An improvement
in asset quality and an increase in service charges on deposit accounts
partially offset these charges to income.
The Company experienced net interest margin compression to 3.21% in 2005 from
3.35% in 2004. Net interest income decreased 2% to $8.7 million for the year
ended December 31, 2005. The Company expects continued pressure on core
earnings as short-term rates are anticipated to continue to rise and long-term
rates are expected to remain relatively unchanged. This interest rate
environment impacts the Company's liability sensitive balance sheet negatively
as deposits and borrowings reprice more rapidly than loans and investment
securities. The Company has implemented an asset/liability management strategy
to combat the current interest rate environment including the growth of more
rate sensitive commercial real estate and commercial loan portfolio, increasing
core deposit relationships and strategies to mitigate the rising cost of
deposits.
The Company's efforts to enhance other interest income during 2005 by increasing
the customer deposit base and increasing overdraft, returned check and
non-sufficient fund charges to be more reflective with local competition
resulted in a 36% increase in service charges on deposit accounts during 2005.
The Company opened a new branch in Central Square, New York in June of 2005.
The branch successfully gathered $6.3 million in deposits in the first seven
months. The Company will continue to focus on growing our market share in
Central Square. Salaries and employee benefits and building occupancy costs
increased primarily from the addition of the new branch combined with fourth
quarter personnel realignment costs. The Company expects salaries and benefits
and building occupancy to increase, as a full year of Central Square operations
will be reflected in 2006. The Company continues to explore cost saving
strategies to minimize the growth of other operating expenses.
RESULTS OF OPERATIONS
Net income for 2005 was $462,000, a decrease of $943,000, or 67%, compared to
net income of $1.4 million for 2004. Basic earnings per share decreased to
$0.19 per share for the year ended December 31, 2005 from $0.58 per share for
the year ended December 31, 2004. Return on average equity decreased 67% to
2.16% in 2005 from 6.45% in 2004.
Net interest income, on a tax equivalent basis, decreased $106,000, or 1%,
primarily resulting from interest rate spread compression as shorter term cost
of funds are repricing at higher rates faster than longer term assets.
Provision for loan losses at December 31, 2005 decreased 58% reflecting improved
asset quality during 2005, combined with slower loan growth. The Company
experienced a 16% increase in other income, net of securities gains and losses,
primarily attributable to increased deposit levels and the related service
charges associated with checking accounts, combined with an increase in the
value of bank owned life insurance. Operating expenses increased 8% due to the
hiring of additional staff and related operating costs at the new Central Square
branch, which opened in June of 2005, along with increased data processing
expenses and an increase in professional and other services.
NET INTEREST INCOME
Net interest income is the Company's primary source of operating income for
payment of operating expenses and providing for possible loan losses. It is the
amount by which interest earned on interest-earning deposits, loans and
investment securities, exceeds the interest paid on deposits and other borrowed
money. Changes in net interest income and the net interest margin ratio result
from the interaction between the volume and composition of earning assets and
interest-bearing liabilities, and their respective yields and funding costs.
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Net interest income, on a tax-equivalent basis, decreased $106,000, or 1%, to
$9.0 million for the year ended December 31, 2005, as compared to the year ended
December 31, 2004. The Company's net interest margin for 2005 decreased to
3.21% from 3.35% in 2004. The decrease in net interest income is attributable
to increased costs of interest-bearing liabilities and was partially offset by
an increase in the yields on interest earning assets. The average balance of
interest-earning assets grew $8.2 million, or 3%, during 2005 and the average
balance of interest-bearing deposits increased by $8.1 million, or 4%. The
increase in the average balance of interest-bearing liabilities primarily
resulted from an increase in the average balance of retail and municipal
deposits. As a result, interest income, on a tax-equivalent basis, increased
$677,000 during 2005. Interest expense on deposits increased $680,000, or 19%,
as the cost of deposits rose to 1.96% in 2005 from 1.71% in 2004. In addition
to the increase in the cost of deposits, interest expense on borrowings also
increased by $103,000, or 5%, from the prior year.
In comparison, net interest income decreased $375,000, or 4%, on a
tax-equivalent basis, from 2003 to 2004. The decrease in net interest income
was comprised of a decrease in interest income of $751,000, or 5%, partially
offset by a decrease in interest expense of $375,000, or 6%. The average balance
of interest-earning assets grew $14.6 million during 2004 and the average
balance of interest-bearing deposits increased by $20.7 million. The increase
in the average balance of interest-bearing liabilities primarily resulted from
attracting new municipal deposit customers. The decrease in the average yield
on interest-earning assets by 60 basis points resulted from the downward
repricing of loans from refinancing and originations in the lower interest rate
environment and the purchase of $35.6 million in investment securities at lower
yields than the existing portfolio.
--------------------------------------------------------------------------------
Page 18
AVERAGE BALANCES AND RATES
The following table sets forth information concerning average interest-earning
assets and interest-bearing liabilities and the yields and rates thereon.
Interest income and resultant yield information in the table is on a fully
tax-equivalent basis using marginal federal income tax rates of 34%. Averages
are computed on the daily average balance for each month in the period divided
by the number of days in the period. Yields and amounts earned include loan
fees. Non-accrual loans have been included in interest-earning assets for
purposes of these calculations.
2005 2004
--------------------------------------------------------------------------------------------------------
Average Average
Average Yield / Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
--------------------------------------------------------------------------------------------------------
Interest-earning assets:
Real estate loans residential $121,875 $ 7,092 5.82% $124,734 $ 7,491 6.01%
Real estate loans commercial 29,385 2,181 7.42% 30,958 2,254 7.28%
Commercial loans 17,563 1,135 6.46% 16,060 901 5.61%
Consumer loans 19,257 1,418 7.36% 17,427 1,194 6.85%
Taxable investment securities 74,496 2,728 3.66% 65,480 2,220 3.39%
Tax-exempt investment securities 13,202 681 5.16% 8,603 488 5.67%
Interest-earning deposits 3,041 71 2.33% 7,338 81 1.10%
--------------------------------------------------------------------------------------------------------
Total interest-earning assets $278,819 $ 15,306 5.49% $270,600 $ 14,629 5.41%
Noninterest-earning assets:
Other assets 31,455 30,236
Allowance for loan losses (1,835) (1,792)
Net unrealized gains
on available for sale securities (1,307) (515)
--------------------------------------------------------------------------------------------------------
Total Assets $307,132 $298,529
=========================================================================================================
Interest-bearing liabilities:
NOW accounts $ 19,877 $ 107 0.54% $ 20,808 $ 135 0.65%
Money management accounts 41,380 835 2.02% 40,775 567 1.39%
Savings and club accounts 65,558 291 0.44% 68,046 453 0.67%
Time deposits 93,732 3,086 3.29% 82,769 2,484 3.00%
Junior subordinated debentures 5,155 351 6.72% 5,155 251 4.80%
Borrowings 37,348 1,686 4.51% 37,674 1,683 4.47%
--------------------------------------------------------------------------------------------------------
Total Interest-bearing liabilities $263,050 $ 6,356 2.42% $255,227 $ 5,573 2.18%
--------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Demand deposits 19,324 17,974
Other liabilities 3,416 3,556
------------------------------------------------------------------------------------
Total liabilities 285,790 276,757
------------------------------------------------------------------------------------
Shareholders' equity 21,342 21,772
------------------------------------------------------------------------------------
Total liabilities & shareholders' equity $307,132 $298,529
====================================================================================
Net interest income $ 8,950 $ 9,056
Net interest rate spread 3.07% 3.22%
Net interest margin 3.21% 3.35%
---------------------------------------------------------------------------------------------------------
Ratio of average interest-earning assets
to average interest-bearing liabilities 105.99% 106.02%
---------------------------------------------------------------------------------------------------------
2003
------------------------------------------------------------------------
Average
Average Yield/
(Dollars in thousands) Balance Interest Cost
------------------------------------------------------------------------
Interest-earning assets:
Real estate loans residential $129,687 $ 8,346 6.44%
Real estate loans commercial 31,122 2,480 7.97%
Commercial loans 14,181 798 6.37%
Consumer loans 15,787 1,225 7.76%
Taxable investment securities 54,115 2,193 4.05%
Tax-exempt investment securities 7,869 305 3.87%
Interest-earning deposits 3,252 33 0.99%
------------------------------------------------------------------------
Total interest-earning assets $256,013 $ 15,380 6.01%
Noninterest-earning assets:
Other assets 24,859
Allowance for loan losses (1,591)
Net unrealized gains
on available for sale securities 52
------------------------------------------------------------------------
Total Assets $279,333
=========================================================================
Interest-bearing liabilities:
NOW accounts $ 17,663 $ 140 0.79%
Money management accounts 21,788 248 1.14%
Savings and club accounts 66,481 511 0.77%
Time deposits 85,751 2,852 3.33%
Junior subordinated debentures 5,000 236 4.66%
Borrowings 43,490 1,961 4.51%
-------------------------------------------------------------------------
Total Interest-bearing liabilities $240,173 $ 5,948 2.48%
-------------------------------------------------------------------------
Noninterest-bearing liabilities:
Demand deposits 16,345
Other liabilities 1,098
------------------------------------------------------------------------
Total liabilities 257,616
------------------------------------------------------------------------
Shareholders' equity 21,717
------------------------------------------------------------------------
Total liabilities & shareholders' equity $279,333
=========================================================================
Net interest income $ 9,432
Net interest rate spread 3.53%
Net interest margin 3.68%
-------------------------------------------------------------------------
Ratio of average interest-earning assets
to average interest-bearing liabilities 106.60%
=========================================================================
INTEREST INCOME
Changes in interest income are derived as a result of the volume of loans and
securities, as measured by changes in the respective average balance and by the
related yields on those balances. Interest income on a tax-equivalent basis
increased $67,000, or 5%. Average loans decreased 1% in 2005, with yields
increasing 3 basis points to 6.29% The Company's average residential mortgage
loan portfolio decreased $2.9 million, or 2%, when comparing the year 2005 to
--------------------------------------------------------------------------------
Page 19
2004. The average yield on the residential mortgage loan portfolio decreased 19
basis points to 5.82% in 2005 from 6.01% in 2004. The $20.2 million in
residential mortgage originations were made at lower rates than the weighted
average yield of the existing portfolio. An increase in the average balance of
consumer loans of $1.8 million, or 11%, resulted from an increase in home equity
loans. The average yield increased 51 basis points, to 7.36% from 6.85% in 2004,
primarily- resulting from the increase in home equity loans, which are based on
the Bank's prime rate. Average commercial loans increased 9% while the
tax-equivalent yield increased 85 basis points to 6.46% in 2005 compared to
5.61%, in 2004. Increases in the average balance of residential real estate,
consumer and commercial loan portfolios were partially offset by a decrease in
the average balance of commercial real estate portfolio of $1.6 million, or 5%.
Average loans decreased $1.6 million in 2004, with average yields declining 48
basis points to 6.26%. The interest income on loans decreased $1.0 million, or
8%, in 2004 compared to 2003. For the comparable periods, average residential
mortgage loans decreased $5.0 million, or 4%, average consumer loans increased
$1.6 million, or 10%, partially offset by a decrease in average commercial loans
by $1.9 million, or 13%, and a decrease in average commercial mortgage loans by
$164,000, or 1%. Loans were originated at lower rates than in the prior period
and a large volume of existing mortgages had their rates modified downward or
were refinanced at lower rates.
Interest income on investment securities increased 26% from 2005, resulting from
an increase in the average balance of investment securities (taxable and
tax-exempt) by $13.6 million, or 18%, to $87.7 million in 2005 from $74.1
million in 2004. The tax-equivalent yield increased 23 basis points to 3.89% in
2005 from 3.66% in 2004 resulting primarily from the purchase of $23.4 million
in investment securities during 2005 at higher yields than the existing
investment portfolio combined with the sale of $4.3 million in lower yielding
investment securities from the portfolio in the fourth quarter of 2005.
Average investment securities (taxable and tax-exempt) in 2004 increased by
$12.1 million, with an increase in tax-equivalent interest income from
investments of $210,000, or 8%, compared to 2003. The average tax-equivalent
yield of the portfolio declined 37 basis points, to 3.66% from 4.03%. The
increase in the average balance of investment securities and the decrease in the
tax-equivalent yield resulted from the significant investment purchases at lower
yields than the existing investment portfolio.
INTEREST EXPENSE
Changes in interest expense are derived as a result of the volume of deposits
and borrowings as measured by changes in the respective average balances and by
the related interest costs on those balances. Interest expense increased
$783,000, or 14%, in 2005, when compared to 2004. The increase in the cost of
funds resulted from an increase in the average cost of interest-bearing
liabilities of 24 basis points, to 2.42% in 2005 from 2.18% at 2004, combined
with a $7.8 million increase in the average balance of interest-bearing
liabilities during 2005. The average cost of deposits increased 25 basis points
to 1.96% during 2005 from 1.71% for 2004. The increase in the cost of average
deposits resulted from rising short-term interest rates. The average cost of
money management accounts increased 63 basis points and the cost of time
deposits increased 29 basis points. The average balance of deposits increased
$8.1 million to $220.5 million at 2005 from $212.4 million at 2004. The
increase in the average balance of deposits primarily resulted from a $2.9
million, or 11%, increase in average balance of municipal deposits as the
Company continues to garner new relationships and an increase in the average
balance of retail deposits resulting primarily from the new branch in Central
Square. The cost of junior subordinated debentures increased 192 basis points,
increasing interest expense by $100,000.
Interest expense decreased $375,000, or 6%, in 2004 compared to 2003. The
average cost of interest bearing liabilities declined 30 basis points during the
12 months ended December 31, 2004.
--------------------------------------------------------------------------------
Page 20
RATE/VOLUME ANALYSIS
Net interest income can also be analyzed in terms of the impact of changing
interest rates on interest-earning assets and interest-bearing liabilities and
changing the volume or amount of these assets and liabilities. The following
table represents the extent to which changes in interest rates and changes in
the volume of interest-earning assets and interest-bearing liabilities have
affected the Company's interest income and interest expense during the periods
indicated. Information is provided in each category with respect to: (i) changes
attributable to changes in volume (change in volume multiplied by prior rate);
(ii) changes attributable to changes in rate (changes in rate multiplied by
prior volume); and (iii) total increase or decrease. Changes attributable to
both rate and volume have been allocated ratably.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
2005 VS. 2004 2004 VS. 2003
------------------------------------------------------------------------------------
INCREASE/(DECREASE) DUE TO INCREASE/(DECREASE) DUE TO
------------------------------------------------------------------------------------
TOTAL TOTAL
INCREASE INCREASE
In thousands) VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
------------------------------------------------------------------------------------
INTEREST INCOME:
Real estate loans residential $(168) $(231) $(399) $(311) $ (544) $(855)
Real estate loans commercial (116) 43 (73) (13) (213) (226)
Commercial loans 89 145 234 81 22 103
Consumer loans 131 93 224 120 (151) (31)
Taxable investment securities 322 186 508 417 (390) 27
Tax-exempt investment securities 240 (47) 193 31 152 183
Interest-earning deposits (65) 55 (10) 45 3 48
------------------------------------------------------------------------------------
Total interest income 433 244 677 370 (1,121) (751)
------------------------------------------------------------------------------------
INTEREST EXPENSE:
NOW accounts (6) (22) (28) 22 (27) (5)
Money management accounts 8 260 268 255 64 319
Savings and club accounts (16) (146) (162) 12 (70) (58)
Time deposits 348 254 602 (96) (272) (368)
Junior subordinated debentures - 100 100 8 7 15
Borrowings (13) 16 3 (262) (16) (278)
------------------------------------------------------------------------------------
Total interest expense 321 462 783 (61) (314) (375)
-----------------------------------------------------------------------------------
Net change in net interest income $ 112 $(218) $(106) $ 431 $ (807) $(376)
===================================================================================
--------------------------------------------------------------------------------
Page 21
NONINTEREST INCOME
The Company's noninterest income is primarily comprised of fees on deposit
account balances and transactions, loan servicing, commissions, and net gains on
securities, loans and foreclosed real estate.
The following table sets forth certain information on noninterest income for the
years indicated.
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
(In thousands) 2005 2004 2003
---------------------------------------------------------------------------------------------
Service charges on deposit accounts $1,318 $ 967 $ 818
---------------------------------------------------------------------------------------------
Loan servicing fees 215 256 282
Increase in the value of bank owned life insurance 218 175 171
Other charges, commissions and fees 582 598 469
Core noninterest income $2,333 $1,996 $1,740
---------------------------------------------------------------------------------------------
Net (losses) gains on sales and impairment of investment securities (205) 772 542
Net (losses) gains on sales of loans and foreclosed real estate (88) 279 326
---------------------------------------------------------------------------------------------
Total noninterest income $2,040 $3,047 $2,608
=============================================================================================
Noninterest income in 2005 decreased 33%, when compared to 2004, as a result of
a 17% increase in core noninterest income and a 128% decrease in the non-core
items, net (losses) gains on sales and impairment of investment securities and
net (losses) gains on sales of loans and foreclosed real estate. Service
charges on deposit accounts increased 36% as the number of deposit accounts
increased, a full year's effect of a fee enhancement program, increased ATM
usage fees and increased internet banking usage. The value of bank owned life
insurance increased 25%. These reductions in core noninterest income were
offset by a decrease in loan servicing fees of 16%, primarily due to a reduction
in fees associated with mortgage and commercial loan late charges, and internal
mortgage legal fees. Investment security losses increased $977,000, when
compared to the 2004 period resulting primarily from net gains recognized in
prior years combined with a $193,000 impairment loss recognized on an equity
security and fourth quarter investment portfolio restructurings. Net losses on
the sale of loans/foreclosed real estate increased $367,000 when compared to the
prior year, as a result of a $215,000 reduction in the gain recognized on the
sale of loans to the secondary market as the volume of loans sold decreased by
25%, combined with adjustments made to the Fannie Mae custodial accounts to
cover additional interest due caused by early pay offs of sold and serviced
loans. Additionally, a $74,000 gain was recognized in 2004 on the remaining
building lots held by Whispering Oaks Development, Inc.
Noninterest income in 2004 increased 17%, compared to 2003, as a result of a 10%
increase in core noninterest income and a 42% increase in the non-core items,
net gains on sales and impairment of investment securities. The increase in the
number of deposit accounts and the introduction of new services to customers
primarily accounted for the $149,000 increase in service charges on deposit
accounts when compared to 2003. A $129,000 increase in other charges,
commissions and fees primarily resulted from recording $54,000 in New York State
grant income associated with a company wide Leadership Training initiative
program, along with increased foreign ATM usage fees and fees associated with
the company's Visa debit card. Net gains on the sale of loans/foreclosed real
estate decreased $47,000, or 14%, resulting primarily from a $40,000 reduction
in the gain recognized on the sale of loans to the secondary market as the
volume of loans sold decreased 47%. Investment security gains increased
$230,000, or 42%, when compared to the 2003 period. Investment security net
gains were recorded on the sale of equity and corporate debt securities.
--------------------------------------------------------------------------------
Page 22
NONINTEREST EXPENSE
The following table sets forth certain information on noninterest expense for
the years indicated.
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
(In thousands) 2005 2004 2003
------------------------------------------------------------------
Salaries and employee benefits $ 5,123 $4,798 $4,455
Building occupancy 1,178 1,169 1,159
Data processing expenses 1,226 981 868
Professional and other services 818 682 770
Amortization of intangible asset 223 223 223
Other expenses 1,492 1,454 1,619
------------------------------------------------------------------
Total noninterest expense $10,060 $9,307 $9,094
==================================================================
Noninterest expenses increased $753,000, or 8%, for the 12 months ended December
31, 2005 when compared to 2004. Salaries and employee benefits increased 7% in
2005 primarily resulting from incremental salary raises, the staffing of a new
Central Square branch and fourth quarter personnel realignment costs. The 1%
increase in building occupancy is primarily due to the operation of the new
Central Square branch for 7 months of 2005. The 25% increase in data processing
expenses during 2005 related to increased depreciation expense, an increase in
internet banking expense due to increased volume of users, increased check
processing charges due to an increase in deposit accounts, and the increased
annual maintenance expense on our core processing system. Professional and
other services increased 20% due to outside consulting charges for performance
management, a process improvement program, and strategic planning projects,
along with increased advertising fees for the new Central Square branch. The 3%
increase in other operating expenses during 2005 resulted primarily from the
charge off of losses on ATM transactions and bad checks, additional ORE expenses
associated with taxes and maintenance of properties, the write off of property
and equipment at our former Fulton Branch, as well as an increase in audits and
exams. These expenses were offset by decreases in postage expense, office
supply expense and lower mortgage recording taxes due to decreased loan volume.
Noninterest expenses increased $213,000, or 2%, for the 12 months ended December
31, 2004 when compared to 2003. Salaries and employee benefits increased 8% in
2004 primarily resulting from incremental salary raises and promotions, the
hiring of a Human Resource Manager and increased pension and health insurance
costs. The 13% increase in data processing expenses during 2004 related to
additional depreciation costs associated with a full year's operation of the new
Fulton branch, combined with a 15% increase in internet banking usage,
additional check processing charges due to a 5% increase in customer volume from
a checking account acquisition program, and additional ATM processing charges
related to the installation of a new ATM machine and products and supplies
resulting from the increase in customer volume. Professional and other services
decreased 11% due to a reduction in legal fees relating to a foreclosed property
in 2003 not recurring in 2004, and a reduction in mortgage consulting fees as
in-house personnel were used to perform work that was originally contracted.
These reductions were offset by an increase in consulting fees associated with
the checking account acquisition program and expenses associated with a
leadership training program. Corresponding grant income recorded in other
income offset the leadership training program expenses. The 10% decrease in
other operating expenses during 2004 resulted primarily from a $164,000 expense
relating to personnel realignment in 2003.
INCOME TAX EXPENSE
In 2005, the Company reported an income tax benefit of $51,000 compared to
income tax expense of $502,000 in 2004. The income tax benefit in 2005 resulted
from the reduction in pretax income while income earned on tax-exempt investment
securities and bank-owned life insurance increased. The effective tax rate
decreased to (12)% in 2005 compared to 26% in 2004. The decrease in the
effective tax rate resulted primarily from an increase in tax-exempt interest
income in proportion to total taxable income. The Company has reduced its tax
--------------------------------------------------------------------------------
Page 23
rate from the statutory rate primarily through the ownership of tax-exempt
investment securities, bank owned life insurance and other tax saving
strategies. Enactment of proposed state tax legislation regarding Real Estate
Investment Trusts would increase the state tax rate for the Company.
Income tax expense decreased $99,000 to $502,000 for the year ended December 31,
2004 as compared to $601,000 in the prior year. The decrease in income tax
expense reflected lower pre-tax income during the year. The Company's effective
tax rate remained at 26% in 2004 and 27% in 2003.
CHANGES IN FINANCIAL CONDITION
INVESTMENT SECURITIES
The investment portfolio represents 29% of the Company's earning assets and is
designed to generate a favorable rate of return consistent with safety of
principal while assisting the Company in meeting the liquidity needs of the loan
and deposit operations and managing the Company's interest rate risk strategies.
All of the Company's investments are classified as available for sale. The
Company invests in investment securities consisting primarily of mortgage-backed
securities, securities issued by United States Government agencies and sponsored
enterprises, state and municipal obligations, mutual funds, equity securities,
investment grade corporate debt instruments, and common stock issued by the
Federal Home Loan Bank of New York (FHLBNY). By investing in these types of
assets, the Company reduces the credit risk of its asset base, but must accept
lower yields than would typically be available on commercial real estate loans
and multi-family real estate loans.
Investment securities decreased $793,000, to $76.0 million at December 31, 2005
from $76.8 million at December 31, 2004. The decrease in investment securities
was primarily attributable to the sale of lower yielding investment securities
in the fourth quarter of 2005. This decrease was offset by acquisitions of
investment securities to collateralize municipal deposits. In comparison,
investment securities increased $17.2 million, or 29%, from 2003 to 2004. The
increase in investment securities was primarily attributable to the acquisition
of investment securities to collateralize municipal deposit accounts.
The following table sets forth the carrying value of the Company's investment
portfolio at the dates indicated.
AT DECEMBER 31,
---------------------------
(In thousands) 2005 2004 2003
--------------------------------------------------------------------------------------------
INVESTMENT SECURITIES:
US Treasury and agencies $ 20,713 $21,609 $ 6,354
State and political subdivisions 11,177 8,881 7,359
Corporate 5,936 5,919 6,421
Mortgage-backed 31,565 32,213 29,734
Equity securities and FHLB stock 2,626 2,800 2,932
Mutual funds 6,177 5,935 5,712
---------------------------------------------------------------------------------------------
78,194 77,357 58,512
Unrealized (loss) gain on available for sale portfolio (2,150) (520) 1,095
---------------------------------------------------------------------------------------------
Total investments in securities $ 76,044 $76,837 $59,607
=============================================================================================
-------------------------------------------------------------------------------
Page 24
The following table sets forth the scheduled maturities, amortized cost, fair
values and average yields for the Company's investment securities at December
31, 2005. Yield is calculated on the amortized cost to maturity and adjusted to
a fully tax-equivalent basis.
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS
----------------------------------------------------------------------------------------------------
ANNUALIZED ANNUALIZED ANNUALIZED
AMORTIZED WEIGHTED AMORTIZED WEIGHTED AMORTIZED WEIGHTED
(Dollars in thousands) COST AVG YIELD COST AVG YIELD COST AVG YIELD
----------------------------------------------------------------------------------------------------
DEBT INVESTMENT SECURITIES:
US Treasury and agencies $ 2,649 1.82% $10,966 3.31% $ 7,098 4.18%
State and political subdivisions 40 3.89% 2,763 3.04% 3,770 3.50%
Corporate 350 6.85% 2,450 4.50% 988 4.93%
----------------------------------------------------------------------------------------------------
Total $ 3,039 2.43% $16,179 3.44% $11,856 4.03%
----------------------------------------------------------------------------------------------------
EQUITY AND MORTGAGE-BACKED SECURITIES:
Mutual funds $ 6,177 1.94% $ - - $ - -
Mortgage-backed - - 3,915 3.87% 8,434 4.00%
Equity securities and FHLB stock 2,627 4.49% - - - -
----------------------------------------------------------------------------------------------------
Total 8,804 2.70% 3,915 3.87% $ 8,434 4.00%
----------------------------------------------------------------------------------------------------
Total investment securities $ 11,843 2.63% $20,094 3.53% $20,290 4.02%
===================================================================================================
MORE THAN TEN YEARS TOTAL INVESTMENT SECURITIES
--------------------------------------------------------------------------------------------
ANNUALIZED ANNUALIZED
AMORTIZED WEIGHTED AMORTIZED FAIR WEIGHTED
(Dollars in thousands) COST AVG YIELD COST VALUE AVG YIELD
--------------------------------------------------------------------------------------------
DEBT INVESTMENT SECURITIES:
US Treasury and agencies $ - - $ 20,713 $19,967 3.42%
State and political subdivisions 4,604 3.97% 11,177 10,980 3.58%
Corporate 2,148 5.31% 5,936 5,854 5.00%
--------------------------------------------------------------------------------------------
Total $ 6,752 4.37% 37,826 $36,801 3.71%
-------------------------------------------------------------------------------------------
EQUITY AND MORTGAGE-BACKED SECURITIES:
Mutual funds - - 6,177 $ 5,895 1.94%
Mortgage-backed 19,216 4.52% 31,565 30,718 4.30%
Equity securities and FHLB stock - - 2,626 2,630 5.08%
--------------------------------------------------------------------------------------------
Total 19,216 4.52% 40,368 39,243 3.99%
--------------------------------------------------------------------------------------------
Total investment securities 25,968 4.49% 78,194 $76,044 3.86%
============================================================================================
-------------------------------------------------------------------------------
Page 25
LOANS RECEIVABLE
Loans receivable represent 71% of the Company's earning assets and account for
the greatest portion of total interest income. The Company emphasizes
residential real estate financing and anticipates a continued commitment to
financing the purchase or improvement of residential real estate in its market
area. The Company also extends credit to businesses within its marketplace
secured by commercial real estate, equipment, inventories and accounts
receivable. It is anticipated that small business lending in the form of
mortgages, term loans, leases, and lines of credit will provide the most
opportunity for balance sheet and revenue growth over the near term. Commercial
loans comprise 10% of the total loan portfolio. At December 31, 2005, 89% of
the Company's total loan portfolio consisted of loans secured by real estate, of
which 17% consisted of commercial real estate loans.
December 31,
-----------------------------------------------------------------------------
(In thousands) 2005 2004 2003 2002 2001
-----------------------------------------------------------------------------
Residential real estate (1) $119,707 $123,898 $128,989 $123,178 $112,110
Commercial real estate 31,845 29,874 31,278 32,657 30,455
Commercial loans 18,334 16,834 15,090 13,196 14,358
Consumer loans 19,682 18,505 16,880 15,068 12,615
-----------------------------------------------------------------------------
$189,568 $189,111 $192,237 $184,099 $169,538
=============================================================================
(1) Includes loans held for sale.
The following table shows the amount of loans outstanding as of December 31,
2005 which, based on remaining scheduled repayments of principal, are due in the
periods indicated. Demand loans having no stated schedule of repayments and no
stated maturity, and overdrafts are reported as one year or less. Adjustable
and floating rate loans are included in the period on which interest rates are
next scheduled to adjust rather than the period in which they contractually
mature, and fixed rate loans are included in the period in which the final
contractual repayment is due.
Due Under Due 1-5 Due Over
(In thousands) One Year Years Five Years Total
---------------------------------------------------------------------
Real estate:
Commercial real estate $ 8,691 $15,067 $ 8,087 $ 31,845
Construction 40 185 2,382 2,607
Residential real estate $39,319 48,640 29,141 117,100
---------------------------------------------------------------------
$48,050 $63,892 $39,610 $151,552
---------------------------------------------------------------------
Commercial 10,576 7,701 57 18,334
Consumer 10,148 4,900 4,634 19,682
---------------------------------------------------------------------
Total loans $68,774 $76,493 $44,301 $189,568
=====================================================================
Interest rates:
Fixed 18,024 49,993 37,279 105,296
Variable 50,750 26,500 7,022 84,272
---------------------------------------------------------------------
Total Loans $68,774 $76,493 $44,301 $189,568
=====================================================================
Total loans receivable remained relatively consistent when compared to the prior
year. The commercial real estate, commercial loan and consumer loan portfolios
increased $2.0 million, $1.5 million and $1.2 million, respectively. The
increases in these portfolios were partially offset by a decrease in the
residential real estate loans of $4.2 million. By comparison, loans receivable
decreased $3.1 million, or 2%, in 2004 from 2003. The decrease of the loan
portfolio from 2003 to 2004 is primarily attributable to the decrease in
residential and commercial mortgages as amortization, prepayments and sales
outpaced loan originations of $29.3 million during 2004. Decreases in the
mortgage portfolios when comparing 2004 to 2003, were partially offset by an
increase in municipal loans and consumer loans. The growth in the consumer loan
portfolio is primarily home equity loan originations.
--------------------------------------------------------------------------------
Page 26
Residential real estate loans decreased $4.2 million, or 3%, during 2005. The
residential real estate portfolio consists of 58% in fixed-rate mortgages and
42% in adjustable-rate mortgages. The decrease in the residential real estate
portfolio is principally due to a net decrease in 15-year fixed rate mortgages
of $5.1 million and a $2.1 million decrease in 30-year fixed rate loans held for
sale, partially offset by an increase in the adjustable rate mortgage portfolio.
The increase in the adjustable rate mortgage portfolio primarily resulted from
an increase in customer demand for the Company's hybrid adjustable rate
mortgages ("ARM"s). Hybrid ARMs have rates that are fixed for an initial period
(principally 3, 5, 7 or 10 years) and then convert to one-year adjustable rate
mortgages.
Commercial real estate loans increased $2.0 million, or 7%, from the prior year
as new loan products were added to the portfolio. Commercial real estate loans
decreased $1.4 million, or 4%, during 2004.
Commercial loans, including loans to municipalities, increased 9% over the prior
year to $18.3 million at December 31, 2005. The increase in commercial loans
resulted primarily from a $1.8 million net increase in small business loans. In
comparison, commercial loans, including municipal loans, increased 12% during
2004 primarily due to the origination of municipal loans.
Consumer loans, which include second mortgage loans, home equity lines of
credit, direct installment and revolving credit loans, increased 6% to $19.7
million at December 31, 2005. The increase resulted from an increase in home
equity lines of credit and second mortgage loans. The Company has promoted its
home equity products by offering the customer loans with no closing costs and
competitive market rates. Management feels these loans are an attractive use of
funds and will continue to promote home equity products in 2006. During 2004,
consumer loans increased $1.6 million, or 10%, resulting primarily from an
increase in home equity products.
NONPERFORMING LOANS AND ASSETS
The following table represents information concerning the aggregate amount of
nonperforming assets:
DECEMBER 31,
----------------------------------------------------------------------------------------------
(Dollars in thousands) 2005 2004 2003 2002 2001
----------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial real estate and commercial $ 757 $ 776 $1,677 $ 603 $ 488
Consumer 89 122 172 166 56
Real estate - construction - - 270 - -
Mortgage 834 953 873 942 1,576
----------------------------------------------------------------------------------------------
Total nonaccrual loans $1,680 $1,851 $2,992 $1,711 $2,120
Loans past due 90 days or more and still accruing - - - - -
----------------------------------------------------------------------------------------------
Total non-performing loans $1,680 $1,851 $2,992 $1,711 $2,120
Foreclosed real estate 743 798 202 1,396 632
----------------------------------------------------------------------------------------------
Total non-performing assets $2,423 $2,649 $3,194 $3,107 $2,752
----------------------------------------------------------------------------------------------
Non-performing loans to total loans 0.89% 0.98% 1.59% 0.95% 1.30%
Non-performing assets to total assets 0.82% 0.88% 1.15% 1.11% 1.13%
----------------------------------------------------------------------------------------------
Interest income received on nonaccrual loans - - - - -
----------------------------------------------------------------------------------------------
Interest income that would have been recorded
under the original terms of the loans $ 34 $ 64 $ 75 $ 141 $ 118
----------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Page 27
The asset quality of the Company's loan portfolio has improved during 2005.
Residential and consumer delinquencies continue to decline by 14% during 2005
and 18% during 2004, resulting from the institution of a more stringent
collection policy. Total nonperforming assets (nonperforming loans and
foreclosed real estate) at December 31, 2005 were 0.81% of total assets as
compared to 0.88% of total assets at December 31, 2004. Total nonperforming
loans (past due 90 days or more) decreased $196,000, or 11%, during 2005 and
decreased 38% during 2004. Total delinquent loans (those 30 days or more
delinquent) as a percentage of total loans were 2.03% at December 31, 2005
compared to 1.93% at December 31, 2004. Approximately 43% of the Company's
nonperforming loans at December 31, 2005 are secured by residential real estate
with loss potential expected to be manageable within the allocated reserves.
The Company generally places a loan on nonaccrual status and ceases accruing
interest when loan payment performance is deemed unsatisfactory and the loan is
past due 90 days or more. The Company considers a loan impaired when, based on
current information and events, it is probable that the Company will be unable
to collect the scheduled payments of principal and interest when due according
to the contractual terms of the loan.
The measurement of impaired loans is generally based upon the present value of
future cash flows discounted at the historical effective interest rate, except
that all collateral-dependent loans are measured for impairment based on fair
value of the collateral. The Company used the fair value of collateral to
measure impairment on commercial and commercial real estate loans in 2005. At
December 31, 2005, the Company had $2.5 million in loans which were deemed to be
impaired having a valuation allowance of $90,000. Of the impaired loan balance,
$2.3 million represents one commercial credit relationship that was restructured
during 2004. A $63,000 impairment reserve is recorded on this relationship.
The customer has been making payments according to the restructured terms and
its financial position has improved significantly.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a reserve established through charges to
expense in the form of a provision for loan losses and reduced by loan
charge-offs net of recoveries. Allowance for loan losses represents the amount
available for probable credit losses in the Company's loan portfolio as
estimated by management. The Company maintains an allowance for loan losses
based upon a monthly evaluation of known and inherent risks in the loan
portfolio, which includes a review of the balances and composition of the loan
portfolio as well as analyzing the level of delinquencies in each segment of the
loan portfolio. The Company uses a general allocation method for the residential
real estate and the consumer loan pools based upon a methodology that uses loss
factors applied to loan balances and reflects actual loss experience,
delinquency trends and current economic conditions. The Company reviews
individually, commercial real estate and commercial loans greater than $150,000,
that are not accruing interest and risk rated under the Company's risk rating
system, as special mention, substandard, doubtful or loss to determine if the
loans are impaired. If loans are determined to be impaired, the Company
establishes a specific reserve allocation. The specific allocation is determined
based on the most recent valuation of the loan's collateral and the customer's
ability to pay. For all other commercial real estate and commercial loans, the
Company uses the general allocation method that establishes a reserve for each
risk rating category. The general allocation method for commercial real estate
and commercial loans considers the same factors that are considered when
evaluating residential real estate and consumer loan pools. The allowance for
loan losses reflects management's best estimate of probable loan losses at
December 31, 2005.
The allowance for loans losses was $1.7 million at December 31, 2005, an 8%
decrease from December 31, 2004. The allowance for loans losses as a percentage
of total loans decreased to 0.89% at December 31, 2005 from 0.98% in the prior
year. Net loan charge-offs were $459,000 during 2005 compared to $626,000 in
2004. The Company experienced a higher level of charge-offs during 2004
resulting from the charge-off of portions of three commercial lending
relationships.
--------------------------------------------------------------------------------
Page 28
The following table sets forth the analysis of the allowance for loan losses at
or for the periods indicated.
2005 2004 2003 2002 2001
----------------------------------------------------------------------------------------------------------------
% GROSS % GROSS % GROSS % GROSS % GROSS
Dollars in thousands) AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
----------------------------------------------------------------------------------------------------------------
Commercial real estate and loans $1,282 26.5% $1,483 24.7% $1,218 24.1% $1,042 24.9% $1,083 26.5%
Consumer loans 289 10.4% 270 9.8% 120 8.8% 136 8.2% 100 7.4%
Residential real estate 108 63.1% 74 65.5% 377 67.1% 303 66.9% 496 66.1%
----------------------------------------------------------------------------------------------------------------
Total $1,679 100.0% $1,827 100.0% $1,715 100.0% $1,481 100.0% $1,679 100.0%
================================================================================================================
The following table sets forth the allocation of allowance for loan losses by
loan category for the periods indicated. The allocation of the allowance by
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
(Dollars in thousands) 2005 2004 2003 2002 2001
-------------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR $1,827 $1,715 $1,481 $ 1,679 $1,274
Allowance acquired in branch purchase - - - 57 -
Provisions charged to operating expenses 311 738 598 1,375 708
-------------------------------------------------------------------------------------------
RECOVERIES OF LOANS PREVIOUSLY CHARGED-OFF:
Commercial real estate and loans 25 41 3 26 53
Consumer 14 20 17 6 9
Residential real estate 10 - 17 - -
-------------------------------------------------------------------------------------------
Total recoveries 49 61 37 32 62
-------------------------------------------------------------------------------------------
LOANS CHARGED OFF:
Commercial real estate and loans (284) (439) (128) (1,285) (72)
Consumer (137) (126) (189) (291) (184)
Residential real estate (87) (122) (84) (86) (109)
-------------------------------------------------------------------------------------------
Total charged-off (508) (687) (401) (1,662) (365)
-------------------------------------------------------------------------------------------
Net charge-offs (459) (626) (364) (1,630) (303)
-------------------------------------------------------------------------------------------
Balance at end of year $1,679 $1,827 $1,715 $ 1,481 $1,679
===========================================================================================
Net charge-offs to average loans outstanding 0.24% 0.33% 0.19% 0.92% 0.19%
Allowance for loan losses to year-end loans 0.89% 0.98% 0.91% 0.82% 1.03%
===========================================================================================
DEPOSITS
The Company's deposit base is drawn from seven full-service offices in its
market area. The deposit base consists of demand deposits, money management
accounts, savings and time deposits. During 2005, 61% of the Company's average
deposit base of $239.9 million consisted of core deposits. Core deposits are
considered to be more stable and provide the Company with a lower cost source of
funds. The Company will continue to emphasize retail deposits by maintaining
its network of full service offices and providing depositors with a full range
of deposit product offerings. Pathfinder Commercial Bank will seek business
growth by focusing on its local identification and service excellence. The
Commercial Bank had an average balance of $31.0 million in municipal deposits in
2005, primarily concentrated in money market demand accounts.
Average deposits increased $9.5 million, or 4%, when compared to 2004. The
increase in average deposits primarily related to a $2.9 million increase in the
average balance of municipal deposits combined with an increase in retail
deposits. The new branch in Central Square added $3.1 million to the average
balance of retail deposits since its opening June of 2005. In comparison,
average deposits from 2003 to 2004 increased $22.3 million, or 11%. Deposit
growth in 2004 resulted from the growth both in retail and in municipal
deposits. The Commercial Bank increased the number of municipal customers to 20
--------------------------------------------------------------------------------
Page 29
in 2004 from 11 in 2003. The new municipal customers account balances
represented $20.2 million of the $30.0 million in municipal deposits outstanding
at December 31, 2004.
The Company's average deposit mix in 2005, as compared to 2004, reflected a
slight shift from savings and club deposits to time deposits. The Company's
average demand deposits, interest and noninterest bearing, represented 16% of
total average deposits, which was comparable with 2004. The Company's money
management accounts represented 17% of total deposits, down 1 percentage point
for the same period in 2004. The Company promotes its money management account
by offering competitive rates to retain existing and attract new customers.
The average amount of deposits, average rate paid and percentage of deposits are
summarized below for the years indicated.
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------
2005 2004 2003
-------------------------------------------------------------------------------------------------------
AVG PERCENT AVG PERCENT AVG PERCENT
AVG RATE OF AVG RATE OF AVG RATE OF
(Dollars in thousands) BALANCE PAID DEPOSITS BALANCE PAID DEPOSITS BALANCE PAID DEPOSITS
-------------------------------------------------------------------------------------------------------
Noninterest bearing
demand accounts $ 19,324 - 8.06% $ 17,974 - 7.80% $ 16,345 - 7.86%
NOW accounts 19,877 0.54% 8.29% 20,808 0.65% 9.03% 17,663 0.79% 8.49%
Money management accounts 41,380 2.02% 17.25% 40,775 1.39% 17.70% 21,788 1.14% 10.47%
Savings and club accounts 65,558 0.44% 27.33% 68,046 0.67% 29.54% 66,481 0.77% 31.96%
Time deposits 93,732 3.29% 39.07% 82,769 3.00% 35.93% 85,751 3.33% 41.22%
-------------------------------------------------------------------------------------------------------
Total average deposits $239,871 1.96% 100.00% $230,372 1.71% 100.00% $208,028 1.96% 100.00%
=======================================================================================================
At December 31, 2005, time deposits in excess of $100,000 totaled $24.0 million,
or 26%, of time deposits and 10% of total deposits. At December 31, 2004, these
deposits totaled $18.3 million, or 22% of time deposits and 8% of total
deposits.
The following table indicates the amount of the Bank's certificates of deposit
of $100,000 or more time remaining until maturity as of December 31, 2005:
CERTIFICATES OF
DEPOSIT OF
In thousands) $100,000 OR MORE
---------------------------------------
REMAINING MATURITY:
Three Months or less $ 6,868
Three through Six months 2,765
Six through twelve months 3,886
Over twelve months 10,515
--------------------------------------
Total $24,034
======================================
--------------------------------------------------------------------------------
Page 30
BORROWINGS
Short-term borrowings are comprised primarily of advances and overnight
borrowing at the FHLBNY. There were $2.0 million in short-term borrowings
outstanding at December 31, 2005 as compared to $1.0 million in 2004.
Information regarding short-term borrowings during 2005, 2004 and 2003 is as
follows:
(Dollars in thousands) 2005 2004 2003
------------------------------------------------------------------------
Maximum outstanding at any month end $15,000 $3,100 $12,000
Average amount outstanding during the year 5,692 1,400 2,660
Average interest rate during the year 3.57% 1.31% 1.17%
------------------------------------------------------------------------
Long-term borrowed funds consist of advances and repurchase agreements from the
FHLBNY and junior subordinated debentures. Long-term borrowed funds totaled
$34.5 million at December 31, 2005 as compared to $39.5 million at December 31,
2004.
CAPITAL
Shareholders' equity decreased $898,000 to $20.9 million at December 31, 2005.
The Company added $462,000 to retained earnings through net income, which was
more than offset by cash dividends returned to its shareholders of $686,000.
Other comprehensive loss increased $978,000 to $1.3 million at December 31,
2005. Additional paid in capital increased $268,000 due to the exercise of
stock options and the allocation of employee stock ownership plan shares.
The Company's mutual holding company parent, Pathfinder Bancorp, M.H.C., waived
its right to receive the dividend for the quarters ended June 30, 2005 and
December 31, 2005.
Risk-based capital provides the basis for which all banks are evaluated in terms
of capital adequacy. Capital adequacy is evaluated primarily by the use of
ratios which measure capital against total assets, as well as against total
assets that are weighted based on defined risk characteristics. The Company's
goal is to maintain a strong capital position, consistent with the risk profile
of its subsidiary banks that supports growth and expansion activities while at
the same time exceeding regulatory standards. At December 31, 2005, Pathfinder
Bank exceeded all regulatory required minimum capital ratios and met the
regulatory definition of a "well-capitalized" institution, i.e. a leverage
capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding 6% and a
total risk-based capital ratio exceeding 10%. See Note 17 in the accompanying
financial statements for the Company's and the Bank's ratios.
LIQUIDITY
Liquidity management involves the Company's ability to generate cash or
otherwise obtain funds at reasonable rates to support asset growth, meet deposit
withdrawals, maintain reserve requirements, and otherwise operate the Company on
an ongoing basis. The Company's primary sources of funds are deposits, borrowed
funds, amortization and prepayment of loans and maturities of investment
securities and other short-term investments, and earnings and funds provided
from operations. While scheduled principal repayments on loans are a relatively
predictable source of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Company manages the pricing of deposits to maintain a desired deposit balance.
In addition, the Company invests excess funds in short-term interest-earning and
other assets, which provide liquidity to meet lending requirements.
The Company's liquidity has been enhanced by its membership in the FHLBNY, whose
competitive advance programs and lines of credit provide the Company with a
--------------------------------------------------------------------------------
Page 31
safe, reliable and convenient source of funds. A significant decrease in
deposits in the future could result in the Company having to seek other sources
of funds for liquidity purposes. Such sources could include, but are not
limited to, additional borrowings, trust preferred security offerings, brokered
deposits, negotiated time deposits, the sale of "available-for-sale" investment
securities, the sale of securitized loans, or the sale of whole loans. Such
actions could result in higher interest expense costs and/or losses on the sale
of securities or loans.
The Asset Liability Management Committee (ALCO) of the Company is responsible
for implementing the policies and guidelines for the maintenance of prudent
levels of liquidity. As of December 31, 2005, the Company is in compliance with
its policy guidelines with regard to liquidity.
AGGREGATE CONTRACTUAL OBLIGATIONS
The following table represents the Company's on and off-balance sheet aggregate
contractual obligations to make future payments as of December 31, 2005:
OVER 1 OVER 3
1 YEAR TO TO OVER 5
(In thousands) OR LESS 3 YEARS 5 YEARS YEARS TOTAL
--------------------------------------------------------------------------------
Time deposits $ 51,724 $ 30,173 $ 7,690 $ 6,568 $ 96,155
Junior subordinated debentures - - - 5,155 5,155
Borrowings 5,000 17,960 8,400 - 31,360
Operating leases 47 98 102 115 362
Payments under benefit plans 305 697 752 9,181 10,935
--------------------------------------------------------------------------------
Total $ 57,075 $ 48,928 $ 16,944 $21,020 $143,967
================================================================================
In addition, the Company, in the conduct of ordinary business operations,
routinely enters into contracts for services. These contracts may require
payment for services to be provided in the future and may also contain penalty
clauses for the early termination of the contract. Management is not aware of
any additional commitments or contingent liabilities, which may have a material
adverse impact on the liquidity or capital resources of the Company.
OFF-BALANCE SHEET ARRANGEMENTS
The Company is also party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. At December 31, 2005, the Company had $19.5 million in
outstanding commitments to extend credit and standby letters of credit. See
Note 15 in the accompanying financial statements.
--------------------------------------------------------------------------------
Page 32
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's risk of loss arising from adverse changes in the fair value of
financial instruments, or market risk, is composed primarily of interest rate
risk. The management of interest rate sensitivity seeks to avoid fluctuating
net interest margins and to provide consistent net interest income through
periods of changing interest rates. The Company has an Asset-Liability
Management Committee (ALCO) which is responsible for establishing policies to
limit exposure to interest rate risk, and to ensure procedures are established
to monitor compliance with those policies. Those procedures include reviewing
the Company's asset and liability policies, setting prices and terms on
rate-sensitive products, and monitoring and measuring the impact of interest
rate changes on the Company's earnings and capital. The Company's Board of
Directors reviews the guidelines established by the ALCO.
Since December of 2004, the Federal Reserve has increased short-term target
rates 8 times, 25 basis points each time to 4.50% from 2.50%. During this time
frame longer-term interest rates have remained relatively unchanged resulting in
a flattening and inversion of the yield curve. The short-term interest rate
increases have caused continued net interest margin compression as short-term
deposits and borrowings on the Company's liability sensitive balance sheet
reprice into the current rate environment while security purchases and loan
originations and refinances were being done at the stable longer-term rates.
During the past 24-month period of rising short-term interest rates, the Company
has continued to practice conservative balance sheet management strategies by
attempting to extend the maturities of its rate sensitive liabilities and
shorten the maturity or repricing term of its rate sensitive assets. This
conservative balance sheet management strategy has resulted in additional margin
pressure and reduction in net interest income during the prior two years.
Management believes this balance sheet strategy best positions the Company and
lessens its risk against future interest rate fluctuations.
The primary objective of the Company's asset/liability management process is to
maximize earnings and return on capital within acceptable levels of risk. The
Company does not believe it is possible to reliably predict future interest rate
movements, and it seeks to maintain an appropriate process and set of
measurement tools that enable it to identify and quantify sources of interest
rate risk ("IRR") in varying rate environments. The primary tools used by the
Company in managing rate risk are income simulation and net portfolio value
modeling techniques.
Interest rate risk can result from timing differences in the maturity/repricing
of an institution's assets, liabilities and off balance sheet contracts; the
effect of embedded options, such as loan prepayments, interest rate caps/floors,
and deposit withdrawals; and the difference in the behavior of the various
lending and funding rates, sometimes referred to as basis risk.
Given the potential types and differing related characteristics of IRR, it is
important that the company maintain an appropriate process and set of
measurement tools that enable it to identify and quantify its primary sources of
IRR. The Company also recognizes that effective management of IRR includes an
understanding of when potential adverse changes in interest rates will flow
through its income statements. Accordingly, the Company not only looks at a 12
month horizon when managing its exposure to IRR, it also considers a longer-term
strategic horizon.
It is the Company's objective to manage its exposure to interest rate risk,
understanding that it is in the business of taking on rate risk and the
elimination of such risk is not possible. It is also understood that as
exposure to interest rate risk is reduced, it may also result in net interest
margin being reduced.
Management believes the modeling and analysis of net interest income (Earnings
at Risk) and net portfolio value (Value at Risk) in different interest rate
environments provides the most meaningful measure of interest rate risk. Net
interest income simulation analysis captures both the potential of all assets
and liabilities to mature or reprice and the probability that they will do so.
Net interest income simulation also attends to the relative interest rate
sensitivities of these items, and projects their behavior over an extended
period of time. Finally, net interest income simulation permits management to
assess the probable effects on the balance sheet not only of changes in interest
rates, but also of proposed strategies for responding to them. Net portfolio
value represents the fair value of net assets (determined as the market value of
--------------------------------------------------------------------------------
Page 33
assets minus the market value of liabilities using a discounted cash flow
technique).
The following table measures the Company's interest rate risk exposure in terms
of the percentage change in its net interest income and net portfolio value as a
result of hypothetical changes in 100 basis point increments in market interest
rates. The table quantifies the changes in net interest income and net
portfolio value to parallel shifts in the yield curve. The column "Percentage
Change in Net Interest Income" measures the change to the next twelve month's
projected net interest income, due to parallel shifts in the yield curve. The
column "Percentage Change in Net Portfolio Value" measures changes in the
current fair value of assets and liabilities to parallel shifts in the yield
curve. The column "NPV Capital Ratio" measures the ratio of the fair value of
net assets to the fair value of total assets at the base case and in 100 basis
point incremental interest rate shocks. The Company uses these percentage
changes as a means to measure interest rate risk exposure and quantifies those
changes against guidelines set by the Board of Directors as part of the
Company's Interest Rate Risk policy. The Company's current interest rate risk
exposure is within those guidelines set forth.
PERCENTAGE PERCENTAGE
CHANGE IN NPV CHANGE IN CHANGE IN
INTEREST CAPITAL NET INTEREST NET PORTFOLIO
RATES RATIO INCOME VALUE
--------------------------------------------------
300 8.77% -12.75% -27.56%
200 9.63% -8.36% -18.54%
100 10.48% -4.10% -9.21%
0 11.26% --- ----
-100 11.55% 1.18% 4.91%
-200 11.20% -3.26% 3.60%
-300 10.60% -8.72% -0.30%
--------------------------------------------------------------------------------
Page 34
An interest rate sensitive asset or liability is one that, within a defined time
period, either matures or experiences an interest rate change in line with
general market interest rates. Historically, the most common method of
estimating interest rate risk was to measure the maturity and repricing
relationships between interest-earning assets and interest-bearing liabilities
at a specific point in time ("GAP"), typically one year. Under this method, a
company is considered liability sensitive when the amount of its
interest-bearing liabilities exceeds the amount of its interest-earning assets
within the one-year horizon. However, assets and liabilities with similar
repricing characteristics may not reprice at the same time or to the same
degree. As a result, the Company's GAP does not necessarily predict the impact
of changes in general levels of interest rates on net interest income.
The following table shows the GAP position for the Company as of December 31,
2005.
MORE
WITHIN 3 TO 12 1 TO 3 3 TO 5 5 TO 10 THAN
(Dollars in thousands) 3 MONTHS MONTHS YEARS YEARS YEARS 10 YEARS
------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Interest earning deposits $ 586 $ - $ - $ - $ - $ -
Investment securities and FHLB stock 12,744 6,675 18,017 15,071 17,732 5,805
Loans receivable 33,355 35,348 46,886 29,098 34,821 10,060
------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 46,685 $ 42,023 $ 64,903 $ 44,169 $ 52,553 $ 15,865
------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Transaction deposit accounts (1) $ 9,450 $ 28,347 $ 19,471 $ - $ - $ -
Savings deposits (1) 274 6,075 13,513 10,097 14,926 15,284
Certificates of deposit 19,333 32,130 30,265 7,858 6,550 19
Borrowings 2,000 3,000 17,960 8,400 - -
Junior subordinated debentures 5,155 - - - - -
------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 36,212 $ 69,552 $ 81,209 $ 26,355 $ 21,476 $ 15,303
------------------------------------------------------------------------------------------------------------------------
Interest-earning assets less interest-
bearing liabilities ("interest rate sensitivity gap") $ 10,473 $(27,529) $(16,306) $ 17,814 $ 31,077 $ 562
------------------------------------------------------------------------------------------------------------------------
Cumulative excess (deficiency) of interest-
sensitive assets over interest-sensitive liabilities $ 10,473 $(17,056) $(33,362) $(15,548) $ 15,529 $ 16,091
------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap to total assets 3.53% -9.27% -5.49% 6.00% 10.47% 0.19%
------------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap to total assets 3.53% -5.74% -11.23% -5.24% 5.23% 5.42%
------------------------------------------------------------------------------------------------------------------------
Ratio of interest-earning assets to interest-
bearing liabilities 128.92% 60.42% 79.92% 167.59% 244.71% 103.67%
------------------------------------------------------------------------------------------------------------------------
Cumulative ratio of interest-earning assets to
interest-bearing liabilities 128.92% 83.87% 82.16% 92.71% 106.61% 106.43%
------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) TOTAL
--------------------------------------------------------------
INTEREST-EARNING ASSETS:
Interest earning deposits $ 586
Investment securities and FHLB stock 76,044
Loans receivable 189,568
---------------------------------------------------------------
Total interest-earning assets $266,198
---------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Transaction deposit accounts (1) $ 57,268
Savings deposits (1) 60,169
Certificates of deposit 96,155
Borrowings 31,360
Junior subordinated debentures 5,155
---------------------------------------------------------------
Total interest-bearing liabilities $250,107
---------------------------------------------------------------
Interest-earning assets less interest-
bearing liabilities ("interest rate sensitivity gap")
---------------------------------------------------------------
Cumulative excess (deficiency) of interest-
sensitive assets over interest-sensitive liabilities
---------------------------------------------------------------
Interest sensitivity gap to total assets
---------------------------------------------------------------
Cumulative interest sensitivity gap to total assets
---------------------------------------------------------------
Ratio of interest-earning assets to interest-
bearing liabilities
---------------------------------------------------------------
Cumulative ratio of interest-earning assets to
interest-bearing liabilities
(1) The following assumptions have been used when analyzing non-maturity
deposits for GAP Table purposes: 14% of savings deposits are assumed to
reprice or mature within one year, 22% within 1 to 3 years, 16% within 3 to
5 years, and 24% within each of the remaining time periods. Transaction
deposits - 66% of the NOW account balances are assumed to reprice or mature
within one year, and the remaining 34% is assumed to reprice or mature
within the 1 to 3 year time frame. 100% of the money management accounts
are assumed to reprice within the first three months
--------------------------------------------------------------------------------
Page 35
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PATHFINDER BANCORP, INC Page
Report of Independent Registered Public Accounting Firm..............37
Consolidated Statements of Condition.................................38
Consolidated Statements of Income....................................39
Consolidated Statements of Changes in Shareholders' Equity...........40
Consolidated Statements of Cash Flows................................41
Notes to Consolidated Financial Statements...........................42
--------------------------------------------------------------------------------
Page 36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
[GRAPHIC OMITED]
To the Board of Directors and Shareholders
Pathfinder Bancorp, Inc.
Oswego, New York
We have audited the accompanying consolidated statements of condition of
Pathfinder Bancorp, Inc. and subsidiaries as of December 31, 2005 and 2004, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2005. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pathfinder
Bancorp, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America.
/s/ BEARD MILLER COMPANY LLP
Beard Miller Company LLP
Harrisburg, Pennsylvania
February 3, 2006
--------------------------------------------------------------------------------
Page 37
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
------------------------
(In thousands, except share data) 2005 2004
--------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 7,309 $ 6,741
Interest earning deposits 586 7,584
--------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 7,895 14,325
--------------------------------------------------------------------------------------------------------
Investment securities, at fair value 74,239 75,069
Federal Home Loan Bank stock, at cost 1,805 1,768
Mortgage loans held-for-sale 0 2,159
Loans 189,568 186,952
Less: Allowance for loan losses 1,679 1,827
--------------------------------------------------------------------------------------------------------
Loans receivable, net 187,889 185,125
Premises and equipment, net 8,020 7,580
Accrued interest receivable 1,678 1,505
Foreclosed real estate 743 798
Goodwill 3,840 3,840
Intangible asset, net 404 627
Bank owned life insurance 5,987 5,768
Other assets 4,448 3,473
--------------------------------------------------------------------------------------------------------
Total assets $ 296,948 $302,037
========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing $ 216,136 $217,513
Noninterest-bearing 20,241 19,159
--------------------------------------------------------------------------------------------------------
Total deposits 236,377 236,672
--------------------------------------------------------------------------------------------------------
Short-term borrowings 2,000 1,000
Long-term borrowings 29,360 34,360
Junior subordinated debentures 5,155 5,155
Other liabilities 3,128 3,024
--------------------------------------------------------------------------------------------------------
Total liabilities 276,020 280,211
Shareholders' equity:
Preferred stock, authorized shares 1,000,000; no shares issued or outstanding
Common stock, par value $.01; authorized 10,000,000 shares;
2,950,419 and 2,937,419 shares issued; and 2,463,132 and
2,450,132 shares outstanding, respectively. 29 29
Additional paid-in-capital 7,721 7,453
Retained earnings 20,965 21,186
Accumulated other comprehensive loss (1,285) (307)
Unearned ESOP shares - (33)
Treasury Stock, at cost; 487,287 shares (6,502) (6,502)
--------------------------------------------------------------------------------------------------------
Total shareholders' equity 20,928 21,826
--------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 296,948 $302,037
=======================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
--------------------------------------------------------------------------------
Page 38
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
--------------------------
(In thousands, except per share data) 2005 2004 2003
-------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME:
Loans, including fees $ 11,794 $11,815 $12,833
Debt securities:
Taxable 2,481 2,075 2,034
Tax-exempt 505 362 226
Dividends 247 145 159
Other 71 81 33
--------------------------------------------------------------------------------------------------
Total interest income 15,098 14,478 15,285
--------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 4,319 3,639 3,751
Interest on short-term borrowings 204 17 31
Interest on long-term borrowings 1,833 1,917 2,166
--------------------------------------------------------------------------------------------------
Total interest expense 6,356 5,573 5,948
--------------------------------------------------------------------------------------------------
Net interest income 8,742 8,905 9,337
PROVISION FOR LOAN LOSSES 311 738 598
--------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 8,431 8,167 8,739
--------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 1,318 967 818
Increase in value of bank owned life insurance 218 175 171
Loan servicing fees 215 256 282
Net (losses) gains on sales and impairment of investment securities (205) 772 542
Net (losses) gains on sales of loans and foreclosed real estate (88) 279 326
Other charges, commissions & fees 582 598 469
--------------------------------------------------------------------------------------------------
Total other income 2,040 3,047 2,608
--------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 5,123 4,798 4,455
Building occupancy 1,178 1,169 1,159
Data processing expenses 1,226 981 868
Professional and other services 818 682 770
Amortization of intangible asset 223 223 223
Other expenses 2,492 1,454 1,619
--------------------------------------------------------------------------------------------------
Total other expenses 10,060 9,307 9,094
--------------------------------------------------------------------------------------------------
Income before income taxes 411 1,907 2,253
(Benefit)/Provision for income taxes (51) 502 601
--------------------------------------------------------------------------------------------------
Net income 462 $ 1,405 $ 1,652
==================================================================================================
Net income per share - basic $ 0.19 $ 0.58 $ 0.68
==================================================================================================
Net income per share - diluted $ 0.19 $ 0.57 $ 0.67
==================================================================================================
Dividends per share $ 0.41 $ 0.405 $ 0.40
==================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
--------------------------------------------------------------------------------
Page 39
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER UNEARNED
COMMON STOCK ISSUED PAID-IN RETAINED COMPREHENSIVE ESOP
(In thousands, except per share data) SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) SHARES
BALANCE, DECEMBER 31, 2002 2,914,669 $ 29 $ 7,114 $ 19,448 $ 579 $ (124)
--------------------------------------- ------------------- -------- ----------- --------------- -------------- ----------
Comprehensive income:
Net income 1,652
Other comprehensive income, net of tax
Unrealized net gains on securities 83
TOTAL COMPREHENSIVE INCOME:
ESOP shares earned 76 46
Stock option exercised 4,717 - 35
Treasury stock purchased
Dividends declared ($.40 per share) (651)
--------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 2,919,386 $ 29 $ 7,225 $ 20,449 $ 662 $ (78)
--------------------------------------- ------------------- -------- ----------- --------------- -------------- ----------
Comprehensive income:
---------------------------------------
Net income 1,405
Other comprehensive loss, net of tax
Unrealized net losses on securities (969)
TOTAL COMPREHENSIVE INCOME:
ESOP shares earned 88 45
Stock option exercised 18,033 - 140
Dividends declared ($.405 per share) (668)
BALANCE, DECEMBER 31, 2004 2,937,419 $ 29 $ 7,453 $ 21,186 $ (307) $ (33)
--------------------------------------- ------------------- -------- ----------- --------------- -------------- ----------
Comprehensive loss:
---------------------------------------
Net income 462
Other comprehensive income, net of tax
Unrealized net gains on securities (978)
TOTAL COMPREHENSIVE LOSS:
ESOP shares earned 55 33
Stock option exercised 13,000 - 213
Dividends declared ($.41 per share) (683)
BALANCE, DECEMBER 31, 2005 2,950,419 $ 29 $ 7,721 $ 20,965 $ (1,285) $ -
--------------------------------------- ------------------- -------- ----------- --------------- -------------- ----------
TREASURY
(In thousands, except per share data) STOCK TOTAL
--------
BALANCE, DECEMBER 31, 2002 $(3,815) $23,231
--------------------------------------- -------- --------
Comprehensive income:
Net income 1,652
Other comprehensive income, net of tax
Unrealized net gains on securities 83
TOTAL COMPREHENSIVE INCOME: 1,735
--------
ESOP shares earned 122
Stock option exercised 35
Treasury stock purchased (2,687) (2,687)
Dividends declared ($.40 per share) (651)
BALANCE, DECEMBER 31, 2003 $(6,502) $21,785
--------------------------------------- -------- --------
Comprehensive income:
---------------------------------------
Net income 1,405
Other comprehensive loss, net of tax
Unrealized net losses on securities (969)
TOTAL COMPREHENSIVE INCOME: 436
--------
ESOP shares earned 133
Stock option exercised 140
Dividends declared ($.405 per share) (668)
BALANCE, DECEMBER 31, 2004 $(6,502) $21,826
--------------------------------------- -------- --------
Comprehensive loss:
---------------------------------------
Net income 462
Other comprehensive income, net of tax
Unrealized net gains on securities (978)
TOTAL COMPREHENSIVE LOSS: (516)
--------
ESOP shares earned 88
Stock option exercised 213
Dividends declared ($.41 per share) (683)
BALANCE, DECEMBER 31, 2005 $(6,502) $20,928
--------------------------------------- -------- --------
The accompanying notes are an integral part of the consolidated financial
statements.
-------------------------------------------------------------------------------
Page 40
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------
(In thousands) 2005 2004 2003
----------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net Income $ 462 $ 1,405 $ 1,652
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Provision for loan losses 311 738 598
ESOP shares earned 88 133 122
Deferred income tax expense 107 502 307
Proceeds from sale of loans 8,795 12,440 23,380
Originations of loans held-for-sale - (10,884) (23,049)
Realized losses (gains) on sales of:
Foreclosed real estate 23 (84) (91)
Loans 65 (195) (235)
Available-for-sale investment securities 205 (772) (542)
Depreciation 697 590 542
Amortization of intangible asset 223 223 223
Amortization of deferred financing costs 30 30 30
Amortization of mortgage servicing rights 123 158 122
Increase in value of bank owned life insurance (218) (175) (171)
Net amortization of premiums and discounts on investment securities 364 358 288
(Increase) decrease in interest receivable (173) (231) 61
Net change in other assets and liabilities (480) (1,855) 159
-----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,622 2,381 3,396
-----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of investment securities available-for-sale and
Federal Home Loan Bank Stock (23,361) (35,610) (25,780)
Proceeds from maturities and principal reductions of
investment securities available-for-sale 15,361 9,897 19,898
Proceeds from sale:
Available-for-sale investment securities 6,593 7,282 9,175
Real estate acquired through foreclosure 770 382 1,890
Purchase of bank owned life insurance - (1,100) -
Net (increase) decrease in loans (10,514) 245 (9,203)
Purchase of premises and equipment (1,137) (1,520) (1,571)
-----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,288) (20,424) (5,591)
-----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits, NOW accounts, savings accounts,
money management deposit accounts and escrow deposits (12,067) 28,441 5,429
Net increase (decrease) in time deposits 11,772 1,337 (3,057)
Net proceeds from (repayments on) short-term borrowings 1,000 (1,100) 1,400
Payments on long-term borrowings (10,000) (4,500) (9,000)
Proceeds from long-term borrowings 5,000 - 5,700
Proceeds from exercise of stock options 213 140 35
Cash dividends (682) (664) (651)
Treasury stock purchased - - (2,687)
-----------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (4,764) 23,654 (2,831)
-----------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (6,430) 5,611 (5,026)
Cash and cash equivalents at beginning of period 14,325 8,714 13,740
-----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 7,895 $ 14,325 $ 8,714
=================================================================================================================
CASH PAID DURING THE PERIOD FOR:
Interest $ 6,338 $ 5,639 $ 5,991
Income taxes paid 95 312 250
NON-CASH INVESTING ACTIVITY:
Transfer of loans to foreclosed real estate 738 894 605
Transfer of loans to loans held-for-sale 6,701 - -
The accompanying notes are an integral part of the consolidated financial
statements
-------------------------------------------------------------------------------
Page 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The accompanying 2005 and 2004 consolidated financial statements include the
accounts of Pathfinder Bancorp, Inc. (the "Company") and its wholly owned
subsidiary, Pathfinder Bank (the "Bank"). The 2003 consolidated financial
statements also include the Company's other subsidiary, Pathfinder Statutory
Trust I (the "Trust"). The Trust was formed in 2002 for the purpose of issuing
mandatorily redeemable convertible securities, which are considered Tier I
capital under regulatory capital adequacy requirements. The Trust was
deconsolidated upon adoption of Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities," and
Interpretation of ARB No 51 (FIN 46), which was revised in December 2003 (See
Note 10). The Bank has three wholly owned operating subsidiaries, Pathfinder
Commercial Bank, Whispering Oaks Development Inc. and Pathfinder REIT, Inc. All
inter-company accounts and activity have been eliminated in consolidation. The
Company has seven full service offices located in Oswego County. The Company is
primarily engaged in the business of attracting deposits from the general public
in the Company's market area, and investing such deposits, together with other
sources of funds, in loans secured by one-to-four family residential real
estate, commercial real estate, business assets and investment securities.
Pathfinder Bancorp, M.H.C., (the "Holding Company") a mutual holding company
whose activity is not included in the accompanying financial statements, owns
approximately 64.3% of the outstanding common stock of the Company. Salaries,
employee benefits and rent approximating $135,000, $130,000 and $124,000, were
allocated from the Company to Pathfinder Bancorp, M.H.C. during 2005, 2004 and
2003, respectively.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Management has identified the allowance for loan losses and the evaluation of
securities for other than temporary impairment to be the accounting areas that
require the most subjective and complex judgments, and as such, could be the
most subject to revision as new information becomes available.
The Company is subject to the regulations of various governmental agencies. The
Company also undergoes periodic examinations by the regulatory agencies which
may subject it to further changes with respect to asset valuations, amounts of
required loss allowances, and operating restrictions resulting from the
regulators' judgments based on information available to them at the time of
their examinations.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Company's activities are with customers located primarily in Oswego
and parts of Onondaga counties of New York State. Note 3 discusses the types of
securities that the Company invests in. Note 4 discusses the types of lending
that the Company engages in. The Company does not have any significant
concentrations to any one industry or customer.
--------------------------------------------------------------------------------
Page 42
ADVERTISING
The Company follows the policy of charging the costs of advertising to expense
as incurred. Advertising costs included in other operating expenses were
$249,000, $224,000 and $245,000 for the year ended December 31, 2005, 2004 and
2003, respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from banks and
interest-bearing deposits (with original maturity of three months or less).
INVESTMENT SECURITIES
The Company classifies investment securities as available-for-sale.
Available-for-sale securities are reported at fair value, with net unrealized
gains and losses reflected as a separate component of shareholders' equity, net
of the applicable income tax effect. None of the Company's investment securities
have been classified as trading or held-to-maturity securities.
Gains or losses on investment security transactions are based on the amortized
cost of the specific securities sold. Premiums and discounts on securities are
amortized and accreted into income using the interest method over the period to
first call or maturity.
The Company monitors investment securities for impairment on a quarterly basis.
Declines in the fair value of investment securities below cost that are deemed
to be other-than-temporary are reflected in earnings as realized losses. In
estimating other-than-temporary impairment losses, management considers (1) the
length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Company to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair value.
FEDERAL HOME LOAN BANK STOCK
Federal law requires a member institution of the Federal Home Loan Bank ("FHLB")
system to hold stock of its district FHLB according to a predetermined formula.
The stock is carried at cost.
MORTGAGE LOANS HELD-FOR-SALE
Mortgage loans held-for-sale are carried at the lower of cost or fair value.
Fair value is determined in the aggregate. As of December 31, 2005, there were
no forward commitments outstanding. As of December 31, 2004, the Company had
approximately $1,000,000 of mortgage loan forward commitments outstanding to
hedge interest rate risk on certain committed and originated loans. The
differences between the settlement value of the forward commitments and the fair
value of these commitments were not significant at December 31, 2004.
TRANSFERS OF FINANCIAL ASSETS
Transfers of financial assets, including sales of loans and loan participations,
are accounted for as sales, when control over the assets has been surrendered.
Control over transferred assets is deemed to be surrendered when (1) the assets
have been isolated from the Company, (2) the transferee obtains the right (free
of conditions that constrain it from taking advantage of that right) to pledge
or exchange the transferred assets, and (3) the Company does not maintain
effective control over the transferred assets through an agreement to repurchase
them before their maturity.
--------------------------------------------------------------------------------
Page 43
LOANS
The Company grants mortgage, commercial and consumer loans to customers. Loans
that management has the intent and ability to hold for the foreseeable future or
until maturity or pay-off, generally are stated at unpaid principal balances,
less the allowance for loan losses and net deferred loan origination fees and
costs. The ability of the Company's debtors to honor their contracts is
dependent upon the real estate and general economic conditions in the market
area. Interest income is generally recognized when income is earned using the
interest method. Nonrefundable loan fees received and related direct origination
costs incurred are deferred and amortized over the life of the loan using the
interest method, resulting in a constant effective yield over the loan term.
Deferred fees are recognized into income and deferred costs are charged to
income immediately upon prepayment of the related loan.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance. The Company periodically evaluates the adequacy of the allowance
for loan losses in order to maintain the allowance at a level that is sufficient
to absorb probable credit losses. Management's evaluation of the adequacy of
the allowance is based on a review of the Company's historical loss experience,
known and inherent risks in the loan portfolio and an analysis of the levels and
trends of delinquencies and charge-offs. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant revision
as more information becomes available.
The allowance consists of specific and general and unallocated components. The
specific component relates to loans that are classified as impaired. For
impaired loans, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower than
the carrying value of that loan. The general component covers non-classified
loans and is based on historical loss experience adjusted for qualitative
factors. An unallocated component is maintained to cover uncertainties that
could affect management's estimate of probable losses. The unallocated
component of the allowance reflects the margin of imprecision inherent in the
underlying assumptions used in the methodologies for estimating specific and
general losses in the portfolio.
A loan is considered impaired, based on current information and events, if it is
probable the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based upon the
present value of future cash flows discounted at the historical effective rate,
except that all collateral-dependent loans are measured for impairment based on
fair values of collateral.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify individual
consumer and residential loans for impairment disclosures, unless such loans are
the subject of a restructuring agreement.
INCOME RECOGNITION ON IMPAIRED AND NON-ACCRUAL LOANS
Loans, including impaired loans, are generally classified as non-accrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days. When a loan is classified as non-accrual and the future
collectibility of the recorded loan balance is doubtful, collections of interest
and principal are generally applied as a reduction to principal outstanding.
--------------------------------------------------------------------------------
Page 44
When future collectibility of the recorded loan balance is expected, interest
income may be recognized on a cash basis. In the case where a non-accrual loan
had been partially charged off, recognition of interest on a cash basis is
limited to that which would have been recognized on the recorded loan balance at
the contractual interest rate. Cash interest receipts in excess of that amount
are recorded as recoveries to the allowance for loan losses until prior
charge-offs have been fully recovered.
OFF-BALANCE SHEET CREDIT RELATED FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company has entered into commitments to
extend credit, including commitments under standby letters of credit. Such
financial instruments are recorded when they are funded.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the related assets, ranging up to 39 years for premises and 10 years
for equipment. Maintenance and repairs are charged to operating expenses as
incurred. The asset cost and accumulated depreciation are removed from the
accounts for assets sold or retired and any resulting gain or loss is included
in the determination of income.
FORECLOSED REAL ESTATE
Properties acquired through foreclosure, or by deed in lieu of foreclosure, are
carried at their fair value less estimated disposal costs. Write downs of, and
expenses related to, foreclosed real estate holdings included in noninterest
expense were $155,000, $85,000 and $124,000 in 2005, 2004 and 2003,
respectively.
INTANGIBLE ASSETS
Intangible assets represent core deposit intangibles and goodwill arising from
acquisitions. Core deposit intangibles represent the premium the Company has
paid for deposits acquired in excess of the cost incurred had the funds been
purchased in the capital markets. Core deposit intangibles are amortized on a
straight-line basis over a period of five years. Goodwill represents the excess
cost of an acquisition over the fair value of the net assets acquired. Goodwill
is not amortized but is evaluated annually for impairment.
MORTGAGE SERVICING RIGHTS
Originated mortgage servicing rights are recorded at their fair value at the
time of transfer and are amortized in proportion to and over the period of
estimated net servicing income or loss. The carrying value of the originated
mortgage servicing rights is periodically evaluated for impairment.
--------------------------------------------------------------------------------
Page 45
STOCK-BASED COMPENSATION
The Company accounts for stock awards issued to directors, officers and key
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25. This method requires that compensation expense
be recognized to the extent that the fair value of the stock exceeds the
exercise price of the stock award at the grant date. The Company generally does
not recognize compensation expense related to stock awards because the stock
awards generally have fixed terms and exercise prices that are equal to or
greater than the fair value of the Company's common stock at the grant date.
There is no pro forma expense reported for 2005 as stock options were fully
vested during 2003. Pro forma amounts of net income and earnings per share
under Statement of Financial Accounting Standards No. 123 are as follows:
(Dollars in thousands) 2003
---------------------------------------------------------------------------------
NET INCOME:
As reported $ 1,652
Total stock-based compensation cost, net of tax, that would
have been included in the determination of net income if the
fair value based method had been applied to all awards 28
---------------------------------------------------------------------------------
Pro forma $ 1,624
=================================================================================
EARNINGS PER SHARE: BASIC DILUTED
---------------------------------------------------------------------------------
As reported $ 0.68 $ 0.67
Pro forma $ 0.67 $ 0.66
=================================================================================
The fair value of these options was estimated at the date of grant in July 2001
using the Black-Scholes options pricing model with the following assumptions:
risk free interest rate - 5.0%; dividend yield - 2.0%; market price volatility -
52.4%. An assumed weighted average option life of 6 years has been utilized.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. No options were
granted during 2005, 2004 and 2003.
RETIREMENT BENEFITS
The Company has established tax qualified retirement plans covering
substantially all full-time employees and certain part-time employees. Pension
expense under these plans is charged to current operations and consists of
several components of net pension cost based on various actuarial assumptions
regarding future experience under the plans. In addition, the Company has
unfunded deferred compensation and supplemental executive retirement plans for
selected current and former employees and officers that provide benefits that
cannot be paid from a qualified retirement plan due to Internal Revenue Code
restrictions. These plans are nonqualified under the Internal Revenue Code, and
assets used to fund benefit payments are not segregated from other assets of the
Company, therefore, in general, a participant's or beneficiary's claim to
benefits under these plans is as a general creditor.
TREASURY STOCK
Treasury stock purchases are recorded at cost. There were no treasury stock
purchases in 2005 and 2004. In 2003, the Company purchased 183,114 shares of
treasury stock at an average cost of $14.67 per share, respectively. 160,114 of
the shares purchased by the Company in 2003 related to a privately negotiated
stock repurchase from Jewelcor Management Inc. The shares were purchased at
$14.60 per share and represented approximately 6.1% of the Company's outstanding
common stock as of December 31, 2002. The privately negotiated transaction was
not part of the share repurchase program in effect for that period. The Company
believes repurchase programs to be in the best interest of its shareholders as a
method to enhance long-term shareholder value.
--------------------------------------------------------------------------------
Page 46
INCOME TAXES
Provisions for income taxes are based on taxes currently payable or refundable
and deferred income taxes on temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are reported in the financial statements at
currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding throughout each year. Diluted
earnings per share gives effect to weighted average shares that would be
outstanding assuming the exercise of issued stock options using the treasury
stock method.
COMPREHENSIVE INCOME (LOSS)
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
statement of condition, such items, along with net income, are components of
comprehensive income.
The components of other comprehensive income (loss) and related tax effects for
the years ended:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
(In thousands) 2005 2004 2003
-------------------------------------------------------------------------------
Gross change in unrealized gains on
securities available for sale $ (1,835) $ (843) $ 681
Reclassification adjustment for (gains) losses
included in net income 205 (772) (542)
----------------------------------------------------------------------------
(1,630) (1,615) 139
Tax effect 652 646 (56)
----------------------------------------------------------------------------
Net of tax amount $ (978) $ (969) $ 83
============================================================================
RECLASSIFICATIONS
Certain amounts in the 2004 and 2003 consolidated financial statements have been
reclassified to conform to the current year presentation. These
reclassifications had no effect on net income as previously reported.
NOTE 2: NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123(R), "Share-Based Payment." Statement No. 123(R) revised
Statement No. 123, "Accounting for Stock-Based Compensation," and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
implementation guidance. Statement No. 123(R) will require compensation costs
related to share-based payment transactions to be recognized in the financial
statements (with limited exceptions). The amount of compensation cost will be
measured based on the grant-date fair value of the equity or liability
instruments issued. Compensation cost will be recognized over the period that
an employee provides service in exchange for the award.
On April 14, 2005, the Securities and Exchange Commission ("SEC") adopted a rule
that amends the compliance dates for Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"). Under the rule, the Company is required to adopt
SFAS No. 123R in the first annual period beginning after June 15, 2005. Since
--------------------------------------------------------------------------------
Page 47
the Company's options are fully granted and vested, the Company does not
anticipate the adoption will have any impact on the consolidated financial
statements.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB No. 107"),
"Share-Based Payment", providing guidance on option valuation methods, the
accounting for income tax effects of share-based payment arrangements upon
adoption of SFAS No. 123(R), and the disclosures in MD&A subsequent to the
adoption. The Company will provide SAB No. 107 required disclosures upon
adoption of SFAS No. 123(R).
In January 2003, the FASB's Emerging Issues Task Force (EITF) issued EITF Issue
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investors" ("EITF 03-1"), and in March 2004, the EITF issued an update.
EITF 03-1 addresses the meaning of other-than-temporary impairment and its
application to certain debt and equity securities. EITF 03-1 aids in the
determination of impairment of an investment and gives guidance as to the
measurement of impairment loss and the recognition and disclosures of
other-than-temporary investments. EITF 03-1 also provides a model to determine
other-than-temporary impairment using evidence-based judgment about the recovery
of the fair value up to the cost of the investment by considering the severity
and duration of the impairment in relation to the forecasted recovery of the
fair value. In July 2005, FASB adopted the recommendation of its staff to
nullify key parts of EITF 03-1. The staff's recommendations were to nullify the
guidance on the determination of whether an investment is impaired as set forth
in paragraphs 10-18 of Issue 03-1 and not to provide additional guidance on the
meaning of other-than-temporary impairment. Instead, the staff recommends
entities recognize other-than-temporary impairments by applying existing
accounting literature such as paragraph 16 of SFAS 115.
In July 2005, the FASB issued a proposed interpretation of FAS 109, "Accounting
for Income Taxes", to clarify certain aspects of accounting for uncertain tax
positions, including issues related to the recognition and measurement of those
tax positions. If adopted as proposed, any adjustments required to be recorded
as a result of adopting the interpretation would be reflected as a cumulative
effect from a change in accounting principle. We are currently in the process
of determining the impact of adoption of the interpretation as proposed on our
financial position and results of operations.
--------------------------------------------------------------------------------
Page 48
NOTE 3: INVESTMENT SECURITIES - AVAILABLE-FOR-SALE
The amortized cost and estimated fair value of investment securities are
summarized as follows:
DECEMBER 31, 2005
-------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(In thousands) COST GAINS LOSSES VALUE
------------------------------------------------------------------------------
Bond investment securities:
US Treasury and agencies $ 20,713 $ - $ (746) $ 19,967
State and political subdivisions 11,177 2 (199) 10,980
Corporate 5,936 24 (106) 5,854
Mortgage-backed 31,565 67 (914) 30,718
------------------------------------------------------------------------------
Total 69,391 93 (1,965) 67,519
Equity investments 6,998 14 (292) 6,720
------------------------------------------------------------------------------
Total investment securities $ 76,389 $ 107 $(2,257) $ 74,239
==============================================================================
DECEMBER 31, 2004
-------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(In thousands) COST GAINS LOSSES VALUE
------------------------------------------------------------------------------
Bond investment securities:
US Treasury and agencies $ 21,609 $ 4 $ (401) $ 21,212
State and political subdivisions 8,881 162 (31) 9,012
Corporate 5,919 92 (52) 5,959
Mortgage-backed 32,213 92 (278) 32,027
------------------------------------------------------------------------------
Total 68,622 350 (762) 68,210
Equity investments 6,967 5 (113) 6,859
------------------------------------------------------------------------------
Total investment securities $ 75,589 $ 355 $ (875) $ 75,069
==============================================================================
Gross gains of $190,000, $828,000 and $581,000 for 2005, 2004 and 2003,
respectively and gross losses of $395,000, $56,000 and $38,000 for 2005, 2004
and 2003, respectively were realized on sales and calls of securities. The tax
benefit related to net losses on investment securities was $80,000 for 2005.
Tax expense related to net gains on investment securities was $301,000 and
$211,000 for 2004 and 2003, respectively. The $395,000 loss in 2005 represented
impairment losses recognized on equity investments and the loss recognized from
the sale of commercial bank portfolio securities.
Investment securities with a carrying value of approximately $38,899,000 at
December 31, 2005 were pledged to collateralize certain deposit and borrowing
arrangements.
--------------------------------------------------------------------------------
Page 49
The amortized cost and estimated fair value of debt investments at December 31,
2005 by contractual maturity are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without penalties.
AMORTIZED ESTIMATED
(In thousands) COST FAIR VALUE
----------------------------------------------------------------
Due in one year or less $ 3,039 $ 3,008
Due after one year through five years 16,179 15,699
Due after five years through ten years 11,856 11,432
Due after ten years 6,752 6,662
Mortgage-backed securities 31,565 30,718
----------------------------------------------------------------
Totals $ 69,391 $ 67,519
================================================================
The Company's investment securities' gross unrealized losses and fair value,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position is as follows:
DECEMBER 31, 2005
------------------------------------------------------------------
LESS THAN TWELVE MONTHS TWELVE MONTHS OR MORE TOTAL
------------------------------------------------------------------------------------------------------------
UNREALIZED FAIR UNREALIZED FAIR UNREALIZED FAIR
(In thousands) LOSSES VALUE LOSSES VALUE LOSSES VALUE
------------------------------------------------------------------------------------------------------------
US Treasury and agency securities $ (106) $ 4,130 $ (639) $15,837 $ (746) $19,967
State and political subdivision securities (152) 8,872 (47) 1,491 (199) 10,363
Corporate securities (35) 1,965 (71) 1,896 (106) 3,861
Mortgage-backed securities (322) 13,814 (593) 15,073 (914) 28,887
Equity investment securities - - (292) 6,135 (292) 6,135
------------------------------------------------------------------------------------------------------------
$ (615) $28,781 $ (1,642) $40,432 $(2,257) $69,213
============================================================================================================
DECEMBER 31, 2004
------------------------------------------------------------------
LESS THAN TWELVE MONTHS TWELVE MONTHS OR MORE TOTAL
------------------------------------------------------------------------------------------------------------
UNREALIZED FAIR UNREALIZED FAIR UNREALIZED FAIR
(In thousands) LOSSES VALUE LOSSES VALUE LOSSES VALUE
------------------------------------------------------------------------------------------------------------
US Treasury and agency securities $ (370) $18,903 $ (31) $ 981 $ (401) $19,884
State and political subdivision securities (31) 2,411 - 56 (31) 2,467
Corporate securities (11) 976 (41) 936 (52) 1,912
Mortgage-backed securities (215) 19,949 (63) 3,301 (278) 23,250
Equity investment securities (10) 240 (103) 3,547 (113) 3,787
------------------------------------------------------------------------------------------------------------
$ (637) $42,479 $ (238) $ 8,821 $ (875) $51,300
============================================================================================================
The Company reviews its securities for impairment at least quarterly, and as a
result of this review, impairment charges of $196,000 were recorded during
December 31, 2005. No impairment losses were recognized in 2004 and 2003.
At December 31, 2005 59 mortgage-backed and 33 US treasury and agency securities
have unrealized losses. These unrealized losses relate principally to changes
in interest rates subsequent to the acquisition of specific securities. None of
the securities in this category had an unrealized loss that exceeded 6% of book
value and a majority had unrealized losses totaling less than 3% of book value.
The Company has the intent and ability to hold the individual securities to
maturity or market price recovery.
--------------------------------------------------------------------------------
Page 50
At December 31, 2005, 32 state and political subdivision securities and 4
corporate securities have unrealized losses. In analyzing the issuer's
financial condition, management considers the industry analyst's reports,
financial performance and projected target prices of investment analysts within
a one-year time frame. None of the securities in this category had an
unrealized loss that exceeded 5% of book value and a majority had unrealized
losses totaling less than 2% of book value. The Company has the intent and
ability to hold the individual securities to maturity or market price recovery.
At December 31, 2005, 3 equity securities had unrealized losses. One of these
securities is a mutual fund backed by adjustable rate mortgage-backed securities
and has an unrealized loss of 3% of book value. The unrealized loss relates
principally to changes in interest rates subsequent to the acquisition of the
mutual fund. A second equity security is a mutual fund consisting primarily of
investment grade dividend-paying common stocks of large capitalization
companies, i.e., companies with market capitalization in excess of $5 billion. A
review of the underlying securities indicates no individually impaired holdings
and there is no indication that the profitability of these corporations is
impaired beyond the economic cycle. As such, the decline in market value is not
considered to be other-than-temporarily impaired. The third equity security has
unrealized losses totaling $10,000, which is deemed to be immaterial to the
consolidated financial statements.
NOTE 4: LOANS
Major classifications of loans at December 31, are as follows:
(In thousands) 2005 2004
----------------------------------------------------
REAL ESTATE MORTGAGES:
Conventional $116,423 $117,608
Construction 2,607 3,497
Commercial 31,845 29,874
----------------------------------------------------
150,875 150,979
----------------------------------------------------
OTHER LOANS:
Consumer 3,363 3,484
Home Equity/2nd Mortgage 16,319 15,021
Lease financing 334 715
Commercial 14,741 12,605
Municipal loans 3,259 3,514
38,016 35,339
----------------------------------------------------
Total loans 188,891 186,318
----------------------------------------------------
Net deferred loan costs 677 634
Less allowance for loan losses (1,679) (1,827)
----------------------------------------------------
Loans receivable, net $187,889 $185,125
====================================================
The Company grants mortgage and consumer loans to customers throughout Oswego
and parts of Onondaga counties. Although the Company has a diversified loan
portfolio, a substantial portion of its debtor's ability to honor their
contracts is dependent upon the counties' employment and economic conditions.
--------------------------------------------------------------------------------
Page 51
The following represents the approximate activity associated with loans to
officers and directors during the fiscal year ending December 31, 2005:
(In thousands)
---------------------------------------
Balance at beginning of year $ 4,910
Originations 3,065
Principal payments (2,394)
---------------------------------------
Balance at end of year $ 5,581
=======================================
NOTE 5: ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the year ended December 31, are
summarized as follows:
(In thousands) 2005 2004 2003
--------------------------------------------------------
Balance at beginning of year $1,827 $1,715 $1,481
Recoveries credited 49 61 37
Provision for loan losses 311 738 598
Loans charged-off (508) (687) (401)
--------------------------------------------------------
Balance at end of year $1,679 $1,827 $1,715
========================================================
The following is a summary of information pertaining to impaired loans for the
years ending December 31,:
(In thousands) 2005 2004 2003
----------------------------------------------------------------------
Impaired loans without a valuation allowance $ - $ - $ -
Impaired loans with a valuation allowance 2,452 3,110 3,804
----------------------------------------------------------------------
Total impaired loans $2,452 $3,110 $3,804
----------------------------------------------------------------------
Valuation allowance related to impaired loans $ 90 $ 760 $ 527
----------------------------------------------------------------------
Average investment in impaired loans $2,856 $3,611 $3,446
----------------------------------------------------------------------
Interest income recognized on impaired loans $ 175 $ 153 $ 139
----------------------------------------------------------------------
Interest income recognized on a cash basis on
impaired loans $ - $ - $ 93
----------------------------------------------------------------------
As of December 31, 2005, no additional funds are committed to be advanced in
connection with impaired loans.
The amount of loans on which the Company has ceased accruing interest aggregated
approximately $1,655,000 and $1,851,000 at December 31, 2005 and 2004,
respectively. There were no loans past due ninety days or more and still
accruing interest at December 31, 2005 or 2004.
NOTE 6: SERVICING
Loans serviced for others are not included in the accompanying consolidated
statements of condition. The unpaid principal balances of mortgage and other
loans serviced for others were $56,300,000, 53,000,000 and $47,600,000 at
December 31, 2005, 2004 and 2003, respectively.
The balance of capitalized servicing rights included in other assets at December
31, 2005 and 2004, was $146,000 and $198,000, respectively.
--------------------------------------------------------------------------------
Page 52
The following summarizes mortgage-servicing rights capitalized and amortized:
(In thousands) 2005 2004 2003
-----------------------------------------------------------
Mortgage servicing rights capitalized $ 70 $ 99 $ 179
Mortgage servicing rights amortized $ 123 $ 158 $ 122
===========================================================
NOTE 7: PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, is as follows:
(In thousands) 2005 2004
---------------------------------------------------
Land $ 1,150 $ 1,150
Buildings 6,590 5,587
Furniture, fixture and equipment 6,120 5,597
Construction in progress 119 508
---------------------------------------------------
$13,979 $12,842
Less: Accumulated depreciation 5,959 5,262
---------------------------------------------------
$ 8,020 $ 7,580
===================================================
NOTE 8: GOODWILL AND INTANGIBLE ASSETS
A summary of intangible assets is as follows:
2005 2004
---------------------------------------------------------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
(In thousands) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---------------------------------------------------------------------------------
Core deposit intangible $ 1,111 $ (707) $ 1,111 $ (484)
Amortization expense related to core deposit intangibles is estimated to total
$223,000 and $181,000 for the years ending December 31, 2006 and 2007,
respectively. Amortization of goodwill and the core deposit intangible is
deductible for tax purposes.
NOTE 9: DEPOSITS
A summary of deposits at December 31, is as follows:
(In thousands) 2005 2004
-------------------------------------------------------
Savings accounts $ 60,176 $ 66,265
Time accounts 72,121 66,133
Time accounts over $100,000 24,034 18,250
Money management accounts 39,009 44,189
Demand deposit interest-bearing 18,259 20,339
Demand deposit noninterest-bearing 20,241 19,159
Mortgage escrow funds 2,537 2,337
-------------------------------------------------------
$236,377 $236,672
=======================================================
--------------------------------------------------------------------------------
Page 53
At December 31, 2005, the scheduled maturities of time deposits are as follows:
(In thousands)
----------------------------
YEAR OF MATURITY:
----------------------------
2006 $51,724
2007 21,221
2008 8,952
2009 5,780
2010 1,910
Thereafter 6,568
---------------------------
$96,155
===========================
NOTE 10: BORROWED FUNDS
The composition of borrowings at December 31 is as follows:
(In thousands) 2005 2004
----------------------------------------------
SHORT-TERM FHLB ADVANCES:
FHLB Advances $ 2,000 $ 1,000
----------------------------------------------
Total short-term borrowings $ 2,000 $ 1,000
==============================================
LONG-TERM:
FHLB Repurchase agreements $ 3,400 $ 3,400
FHLB advances 25,960 30,960
----------------------------------------------
Total long-term borrowings $29,360 $34,360
==============================================
The principal balance, interest rate and maturity of the above borrowings at
December 31, 2005 is as follows:
TERM PRINCIPAL RATES
----------------------------------------------------------------------
(Dollars in thousands)
Short-term advances with FHLB $ 2,000 3.97%-4.13%
Long-term:
----------------------------------------------------------------------
Repurchase agreements (due in 2006 and 2009) 3,400 5.56% -5.85%
Advances with FHLB
----------------------------------------------------------------------
due within 1 year 2,000 4.72%-5.32%
due within 2 years 11,350 3.00%-5.04%
due within 3 years 6,610 2.67%-5.98%
due within 4 years 1,000 6.00%
due within 5 years 5,000 4.39%
----------------------------------------------------------------------
Total advances with FHLB $ 25,960
----------------------------------------------------------------------
Total long-term borrowings $ 29,360
======================================================================
The repurchase agreements with the Federal Home Loan Bank ("FHLB") are
collateralized by certain investment securities having a carrying value of
$3,689,000 at December 31, 2005. The collateral is under the Company's control.
The line of credit agreement with the FHLB is used for liquidity purposes.
Interest on this line is determined at the time of borrowing. The average rate
paid on the overnight line during 2005 approximated 3.57%. At December 31,
2005, $28,725,000 was available under the line of credit. In addition to the
overnight line of credit program, the Company also has access to the FHLB's Term
Advance Program under which it can borrow at various terms and interest rates.
Residential mortgage loans with a carrying value of $84,899,000 and FHLB stock
with a carrying value of $1,805,000 have been pledged by the Company under a
blanket collateral agreement to secure the Company's line of credit and term
--------------------------------------------------------------------------------
Page 54
borrowings. The Company also maintains a $5,000,000 line of credit with a
correspondent bank. Interest on the line is determined at the time of
borrowing. The Company did not draw on the line during 2005. Investment
securities with a carrying value of $6,384,000 at December 31, 2005
collateralize the line of credit.
The Company has a non-consolidated subsidiary trust, Pathfinder Statutory Trust
I, of which 100% of the common equity is owned by the Company. The Trust issued
$5,000,000 of 30 year floating rate Company-obligated pooled capital securities
of Pathfinder Statutory Trust I. The Company borrowed the proceeds of the
capital securities from its subsidiary by issuing floating rate junior
subordinated deferrable interest debentures having substantially similar terms.
The capital securities mature in 2032 and are treated as Tier 1 capital by the
Federal Deposit Insurance Company and the Office of Thrift Supervision. The
capital securities of the trust are a pooled trust preferred fund of Preferred
Term Securities VI, Ltd. and are tied to the 3-month LIBOR plus 3.45% (7.97% at
December 31, 2005 and 6.00% at December 31, 2004) with a five-year call
provision. The Company guarantees all of these securities. The Company
capitalized $151,000 of deferred financing costs associated with the debt
issuance, which are being amortized on a straight-line basis over the 5-year
period to call date.
The Company's equity interest in the trust subsidiary of $155,000 is reported in
"Other assets". For regulatory reporting purposes, the Federal Reserve Board
has indicated that the preferred securities will continue to qualify as Tier 1
Capital subject to previously specified limitations, until further notice. If
regulators make a determination that Trust Preferred Securities can no longer be
considered in regulatory capital, the securities become callable and the Company
may redeem them.
NOTE 11: EMPLOYEE BENEFITS AND DEFERRED COMPENSATION AND SUPPLEMENTAL
RETIREMENT PLANS
The Company has a noncontributory defined benefit pension plan covering
substantially all employees. The plan provides defined benefits based on years
of service and final average salary. In addition, the Company provides certain
health and life insurance benefits for eligible retired employees. The
healthcare plan is contributory with participants' contributions adjusted
annually; the life insurance plan is noncontributory. Employees with less than
14 years of service as of January 1, 1995, are not eligible for the health and
life insurance retirement benefits.
The Company uses an October 1 measurement date for the defined benefit plan and
postretirement benefit plan.
--------------------------------------------------------------------------------
Page 55
The following tables set forth the changes in the plan's benefit obligation,
fair value of plan assets and prepaid (accrued) benefit (cost) as of December
31:
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------------------------------------------------------------------------------
(In thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligation at beginning of year $ 3,745 $ 3,382 $ 309 $ 367
Service cost 151 155 2 2
Interest cost 229 207 18 19
Actuarial gain (loss) 378 153 46 (58)
Plan participants' contributions - - 6 12
Benefit paid (142) (152) (27) (33)
-------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 4,361 $ 3,745 $ 354 $ 309
-------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $ 3,154 $ 2,792 $ - $ -
Actual return on plan assets 388 236 - -
Plan participants' contributions - - 6 12
Benefits paid (142) (152) (27) (33)
Employer contributions 670 278 21 21
-------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 4,070 $ 3,154 $ - $ -
-------------------------------------------------------------------------------------------
COMPONENTS OF PREPAID/ACCRUED BENEFIT COST:
Unfunded status $ (291) $ (591) $(354) $(309)
Unrecognized transition obligation - - 115 134
Unrecognized actuarial net loss/(gain) 1,656 1,478 34 (13)
-------------------------------------------------------------------------------------------
Prepaid/(accrued) benefit/(cost) $ 1,365 $ 887 $(205) $(188)
===========================================================================================
The accumulated benefit obligation for the defined benefit plan was $3,602,000
and $3,042,000 at December 31, 2005 and 2004, respectively.
The significant assumptions used in determining the benefit obligation as of
December 31, 2005, 2004 and 2003 are as follows:
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------------------------
2005 2004 2003 2005 2004 2003
------------------------------------------------------------------------------------------------
Weighted average discount rate 5.88% 6.25% 6.50% 5.88% 6.25% 6.00%
Expected long term rate of return on plan assets 9.00% 9.00% 9.00% - - -
Rate of increase in future compensation levels 3.00% 3.50% 4.00% - - -
================================================================================================
Assumed health care cost trend rates have a significant effect on the amounts
reported for the postretirement health care plans. The annual rates of increase
in the per capita cost of covered medical and prescription drug benefits for
year-end calculations were assumed to be 9.5% and 10.0%, respectively. The rates
were assumed to decrease gradually to 3.75% in 2011 and remain at that level
thereafter. A one-percentage point change in the health care cost trend rates
would have the following effects:
1 PERCENTAGE 1 PERCENTAGE
POINT POINT
(In thousands) INCREASE DECREASE
----------------------------------------------------------------------------
Effect on total of service and interest
cost components $ 21 $ (20)
Effect on post retirement benefit obligation 15 (11)
============================================================================
--------------------------------------------------------------------------------
Page 56
The composition of the net periodic benefit plan cost for the years ended
December 31, 2005, 2004 and 2003 is as follows:
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------------------------------
(In thousands) 2005 2004 2003 2005 2004 2003
------------------------------------------------------------------------------------
Service cost $ 151 $ 155 $ 154 $ 2 $ 2 $ 2
Interest cost 229 207 200 18 19 21
Amortization of transition obligation - - - 19 18 18
Amortization of gains and losses 96 94 106 - - 1
Expected return on plan assets (285) (254) (227) - - -
------------------------------------------------------------------------------------
Net periodic benefit plan cost $ 191 $ 202 $ 233 $ 39 $ 39 $ 42
====================================================================================
The significant assumptions used in determining the net periodic benefit plan
cost for years ended December 31:
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------------------
2005 2004 2003 2005 2004 2003
----------------------------------------------------------------------------------------------
Weighted average discount rate 5.88% 6.25% 6.50% 5.88% 6.25% 6.00%
Expected long term rate of return on plan assets 9.00% 9.00% 9.00% - - -
Rate of increase in future compensation levels 3.00% 3.50% 4.00% - - -
==============================================================================================
The long-term rate-of-return-on-assets assumption was set based on historical
returns earned by equities and fixed income securities, adjusted to reflect
expectations of future returns as applied to the plan's target allocation of
asset classes. Equities and fixed income securities were assumed to earn real
rates of return in the ranges of 5-9.0% and 2-6.0%, respectively. The long-term
inflation rate was estimated to be 3.0%. When these overall return expectations
are applied to the plan's target allocation, the expected rate of return is
determined to be 9.0%, which is roughly the midpoint of the range of expected
return.
The Company's pension plan weighted-average asset allocations at October 1, the
measurement date, by asset category
ASSET CATEGORY 2005 2004
-------------------------------
Equity securities 72% 69%
Debt securities 28% 31%
-------------------------------
Total 100% 100%
===============================
Plan assets are invested in six diversified investment funds of the RSI
Retirement Trust (the "Trust"), a no load series open-ended mutual fund. The
investment funds include four equity mutual funds and two bond mutual funds,
each with its own investment objectives, investment strategies and risks, as
detailed in the Trust's prospectus. The Trust has been given discretion by the
Plan Sponsor to determine the appropriate strategic asset allocation versus plan
liabilities, as governed by the Trust's Statement of Investment Objectives and
Guidelines (the "Guidelines").
The long-term investment objective is to be invested 65% in equity securities
(equity mutual funds) and 35% in debt securities (bond mutual funds). If the
plan is underfunded under the Guidelines, the bond fund portion will be
temporarily increased to 50% in order to lessen asset value volatility. When
the plan is no longer underfunded, the bond fund portion will be decreased back
to 35%. Asset rebalancing is performed at least annually, with interim
adjustments made when the investment mix varies more than 5% from the target
(i.e., a 10% target range).
The investment goal is to achieve investment results that will contribute to the
proper funding of the pension plan by exceeding the rate of inflation over the
long-term. In addition, investment managers for the Trust are expected to
--------------------------------------------------------------------------------
Page 57
provide above average performance when compared to their peer managers.
Performance volatility is also monitored. Risk/volatility is further managed by
the distinct investment objectives of each of the Trust funds and the
diversification within each fund.
For the fiscal year ending December 31, 2006, the Bank expects to contribute
approximately $192,000 to the Plan.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid.
YEARS ENDING DECEMBER 31:
--------------------------------
(In thousands)
--------------------------------
2006 $148
2007 148
2008 145
2009 148
2010 152
Years 2011 - 2015 981
================================
The Company also offers a 401(k) plan to its employees. Contributions to this
plan by the Company were $145,000, $92,000 and $84,000 for 2005, 2004 and 2003,
respectively.
The Company maintains optional deferred compensation plans for its directors
whereby fees normally received are deferred and paid by the Company based upon a
payment schedule commencing at age 65 and continue monthly for 10 years.
Directors must serve on the board for a minimum of 5 years to be eligible for
the Plan. At December 31, 2005 and 2004, other liabilities include approximately
$1,412,0000 and $1,276,000, respectively, relating to deferred compensation.
Deferred compensation expense for the years ended December 31, 2005, 2004 and
2003 amounted to approximately $211,000, $185,000 and $116,000, respectively.
The Company has a supplemental executive retirement plan for the benefit of
certain executive officers. At December 31, 2005 and 2004, other liabilities
include approximately $424,000 and $449,000 accrued under these plans.
Compensation expense includes approximately $56,000, $53,000 and $68,000
relating to the supplemental executive retirement plan for 2005, 2004 and 2003,
respectively.
To fund the benefits under these plans, the Company is the owner of single
premium life insurance policies on participants in the non-qualified retirement
plans. At December 31, 2005 and 2004, the cash value of these policies was
$5,987,000 and $5,768,000, respectively.
NOTE 12: STOCK BASED COMPENSATION PLANS
In February 1997, the Board of Directors approved an option plan and granted
options there under with an exercise price equal to the market value of the
Company's shares at the date of grant. Under the Stock Option Plan, up to
132,249 options have been authorized for grant of incentive stock options and
nonqualified stock options.
In July 2001, the Board approved the issuance of 38,499 stock options remaining
in the 1997 Stock Option Plan. The exercise price is equal to the market value
of the Company's shares at the date of grant ($8.34). The options granted under
the issuance have a 10-year term with one-third vesting upon grant date and the
remaining vesting and becoming exercisable ratably over a 2-year period.
--------------------------------------------------------------------------------
Page 58
Activity in the Stock Option Plan is as follows:
WEIGHTED
OPTIONS AVERAGE SHARES
(Shares in thousands) OUTSTANDING EXERCISE PRICE EXERCISABLE
--------------------------------------------------------------------------------
Outstanding at December 31, 2002 93 $ 7.27 80
--------------------------------------------------------------------------------
Exercised (5) 7.49
Outstanding at December 31, 2003 88 $ 7.25 88
--------------------------------------------------------------------------------
Exercised (18) 7.75
Outstanding at December 31, 2004 70 $ 7.12 70
--------------------------------------------------------------------------------
Exercised (13) 6.58
Expired (11) 6.58
Outstanding at December 31, 2005 46 $ 7.41 46
--------------------------------------------------------------------------------
The Bank sponsors an Employee Stock Ownership Plan (ESOP) for employees who have
attained the age of 21 and who have completed a 12 month period of employment
with the Bank during which they worked at least 1,000 hours. The Bank purchased
92,574 shares of common stock on behalf of the ESOP. The purchase of the shares
was funded by a loan from the Company and the unearned shares are pledged as
collateral for the borrowing. As the loan was repaid, earned shares were
released from collateral and allocated to the participants. As shares were
earned, the Bank records compensation expense at the average market price of the
shares during the period. Cash dividends received on unearned shares were
allocated among the participants and were reported as compensation expense.
ESOP compensation expense, including cash dividends received on unearned shares,
approximated $88,000, $136,000 and $129,000 for the years ended December 31,
2005, 2004 and 2003, respectively. Total earned shares at December 31, 2005,
2004 and 2003 were 92,574, 86,998 and 79,367, respectively. Unearned ESOP
shares are not considered outstanding for purposes of computing earnings per
share. All shares were earned at December 31, 2005.
NOTE 13: INCOME TAXES
The provision for income taxes for the years ended December 31, is as follows:
(In thousands) 2005 2004 2003
-------------------------------------
Current $(160) $ - $ 294
Deferred 109 502 307
-------------------------------------
$ (51) $ 502 $ 601
=====================================
The provision for income taxes includes the following:
(In thousands) 2005 2004 2003
-----------------------------------------------------
Federal Income Tax $ (29) $ 520 $ 631
New York State Franchise Tax (22) (18) (30)
-----------------------------------------------------
$ (51) $ 502 $ 601
=====================================================
--------------------------------------------------------------------------------
Page 59
The components of net deferred tax asset, included in other assets for the years
ended December 31, are as follows:
(In thousands) 2005 2004
---------------------------------------------------------------
ASSETS:
Deferred compensation $ 715 $ 672
Allowance for loan losses 654 712
Postretirement benefits 82 74
Mortgage recording tax credit carryforward 361 304
Investment securities 865 213
Other 121 49
---------------------------------------------------------------
$ 2,798 $ 2,024
===============================================================
LIABILITIES:
Prepaid pension (532) (345)
Depreciation (647) (671)
Accretion (37) (47)
Loan origination fees (250) (236)
Intangible assets (432) (328)
Prepaid expenses (79) (119)
---------------------------------------------------------------
$(1,977) $(1,746)
---------------------------------------------------------------
Net deferred tax asset $ 821 $ 278
===============================================================
The Company has a New York State mortgage recording tax credit that has no carry
forward limitations. The Company has determined that no valuation allowance is
necessary as it is more likely than not deferred tax assets will be realized
through carryback to taxable income in prior years, future reversals of existing
temporary differences and through future taxable income. A reconciliation of
the federal statutory income tax rate to the effective income tax rate for the
years ended December 31, is as follows:
2005 2004 2003
---------------------------------------------------------------
Federal statutory income tax rate 34.0% 34.0% 34.0%
State tax (3.0) (0.9) (0.6)
Tax-exempt interest income, net of TEFRA (44.8) (6.0) (5.1)
Increase in value of life insurance (18.1) (3.1) (2.6)
Other 19.5 2.3 1.0
---------------------------------------------------------------
Effective income tax rate (12.4)% 26.3% 26.7%
===============================================================
--------------------------------------------------------------------------------
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The following is a reconciliation of basic to diluted earnings per share for the
years ended December 31:
(Dollars in thousands, except per share data) EARNINGS SHARES EPS
-----------------------------------------------------------------------
2005 Net Income $ 462
Basic EPS 462 2,456 $0.19
-----------------------------------------------------------------------
Effect of dilutive securities
Stock options - 25
-----------------------------------------------------------------------
Diluted EPS $ 462 2,481 $0.19
-----------------------------------------------------------------------
2004 Net Income $ 1,405
Basic EPS 1,405 2,435 $0.58
-----------------------------------------------------------------------
Effect of dilutive securities
Stock options - 44
-----------------------------------------------------------------------
Diluted EPS $ 1,405 2,479 $0.57
-----------------------------------------------------------------------
2003 Net Income $ 1,652
Basic EPS 1,652 2,424 $0.68
-----------------------------------------------------------------------
Effect of dilutive securities
Stock options - 48
-----------------------------------------------------------------------
Diluted EPS $ 1,652 2,472 $0.67
=======================================================================
NOTE 15: COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Such commitments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated statement of
condition. The contractual amount of those commitments to extend credit reflects
the extent of involvement the commitment has in this particular class of
financial instrument. The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit is represented by the contractual amount of the instrument.
The Company's exposure to credit loss is represented by the contractual amount
of these commitments. The Company uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
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At December 31, 2005 and 2004, the following financial instruments were
outstanding whose contract amounts represent credit risk:
CONTRACT AMOUNT
-----------------------------------------------------------------------
(In thousands) 2005 2004
-----------------------------------------------------------------------
Commitments to grant loans $ 6,371 $ 5,120
Unfunded commitments under lines of credit 12,361 12,021
Standby letters of credit 798 1,106
=======================================================================
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitment amounts are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counter party. Collateral held varies but
may include residential real estate and income-producing commercial properties.
Unfunded commitments under standby letters of credit, revolving credit lines and
overdraft protection agreements are commitments for possible future extensions
of credit to existing customers. These lines of credit usually do not contain a
specified maturity date and may not be drawn upon to the total extent to which
the Company is committed.
Outstanding letters of credit written are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. The majority
of these standby letters of credit expire within the next twelve months. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending other loan commitments. The Bank requires collateral
supporting these letters of credit as deemed necessary. Management believes
that the proceeds obtained through a liquidation of such collateral would be
sufficient to cover the maximum potential amount of future payments required
under the corresponding guarantees. The amount of the liability as of December
31, 2005 and 2004 or guarantees under standby letters of credit issued is not
material.
The Company leases land and leasehold improvements under agreements that expire
in various years with renewal options over the next 30 years. Rental expense,
included in operating expenses, amounted to $42,000, $41,000 and $41,000 in
2005, 2004 and 2003, respectively. In October 2002, the Company entered into a
land lease with one of its directors on an arms-length basis. The rent expense
paid to the related party during 2005, 2004 and 2003 was $23,000, $21,000 and
$21,000, respectively. Approximate minimum rental commitments for the
noncancelable operating leases are as follows:
YEARS ENDING DECEMBER 31:
------------------------------------
(In thousands)
2006 $ 47
2007 47
2008 51
2009 51
2010 51
Thereafter 115
-----------------------------------
Total minimum lease payments $362
===================================
NOTE 16: DIVIDENDS AND RESTRICTIONS
The board of directors of Pathfinder Bancorp, M.H.C., determines whether the
Holding Company will waive or receive dividends declared by the Company each
time the Company declares a dividend, which is expected to be on a quarterly
basis. The Holding Company may elect to receive dividends and utilize such funds
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to pay expenses or for other allowable purposes. The Office of Thrift
Supervision ("OTS") has indicated that (i) the Holding Company shall provide the
OTS annually with written notice of its intent to waive its dividends prior to
the proposed date of the dividend, and the OTS shall have the authority to
approve or deny any dividend waiver request; (ii) if a waiver is granted,
dividends waived by the Holding Company will be excluded from the Company's
capital accounts for purposes of calculating dividend payments to minority
shareholders; (iii) the Company shall establish a restricted capital account in
the amount of any dividends waived by the Holding Company, and the amount of any
dividend waived by the Holding Company shall be available for declaration as a
dividend solely to the Holding Company. During 2005, the Company paid cash
dividends totaling $325,000 to the Holding Company. For the second and fourth
quarters ending June 30, 2005 and December 31, 2005, respectively, the Holding
Company waived the right to receive its portion of the cash dividends declared
on June 28, 2005 and December 27, 2005, respectively, which totaled $325,000.
The Company maintains a restricted capital account with a $1,532,000 balance,
representing the Holding Company's portion of dividends waived as of December
31, 2005. During 2004 and 2003, the Holding Company waived dividends totaling
$320,000 and $317,000, respectively.
The Company's ability to pay dividends to its shareholders is largely dependent
on the Bank's ability to pay dividends to the Company. In addition to state law
requirements and the capital requirements discussed in Note 17 the circumstances
under which the Bank may pay dividends are limited by federal statutes,
regulations and policies. The amount of retained earnings legally available
under these regulations approximated $1,670,000 as of December 31, 2005.
Dividends paid by the Bank to the Company would be prohibited if the effect
thereof would cause the Bank's capital to be reduced below applicable minimum
capital requirements.
NOTE 17: REGULATORY MATTERS
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of the their assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors. Prompt
corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain amounts and ratios (set forth in the table below)
of total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier 1 capital (as defined) to average assets (as
defined). Management believes, as of December 31, 2005, that the Bank meets all
capital adequacy requirements to which it is subject.
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As of December 31, 2005, the Bank's most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as "well-capitalized", under
the regulatory framework for prompt corrective action. To be categorized as
"well-capitalized", the Bank must maintain total risk based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the tables below. There are no
conditions or events since that notification that management believes have
changed the Bank's category. The Company's and the Bank's actual capital
amounts and ratios as of December 31, 2005and 2004 are also presented in the
following table.
"To Be Well
Capitalized"
For Capital Under Prompt
Actual Adequacy Purposes Corrective Provisions
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------------------
COMPANY
As of December 31, 2005:
Total Core Capital (to Risk-Weighted Assets) $24,802 13.5% $14,706 8.0% N/A N/A
Tier 1 Capital (to Risk-Weighted Assets) $23,123 12.6% $ 7,353 4.0% N/A N/A
Tier 1 Capital (to Average Assets) $23,123 7.6% $12,167 4.0% N/A N/A
---------------------------------------------------------------------------------------------
BANK
As of December 31, 2005:
Total Core Capital (to Risk-Weighted Assets) $22,957 12.6% $14,615 8.0% $18,269 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $21,278 11.7% $ 7,307 4.0% $10,961 6.0%
Tier 1 Capital (to Average Assets) $21,278 7.1% $11,927 4.0% $14,909 5.0%
-----------------------------------------------------------------------------------------------
COMPANY
As of December 31, 2004:
Total Core Capital (to Risk-Weighted Assets) $24,493 13.5% $14,472 8.0% N/A N/A
Tier 1 Capital (to Risk-Weighted Assets) $22,666 12.5% $ 7,236 4.0% N/A N/A
Tier 1 Capital (to Average Assets) $22,666 7.7% $11,775 4.0% N/A N/A
------------------------------------------------------------------------------------------------
BANK
As of December 31, 2004:
Total Core Capital (to Risk-Weighted Assets) $22,974 12.8% $14,416 8.0% $18,020 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $21,147 11.7% $ 7,208 4.0% $10,812 6.0%
Tier 1 Capital (to Average Assets) $21,147 7.1% $11,947 4.0% $14,934 5.0%
-----------------------------------------------------------------------------------------------
The Bank is required to maintain average balances on hand or with the Federal
Reserve Bank. At December 31, 2005 and 2004, these reserve balances amounted to
$1,608,000 and $2,419,000, respectively.
NOTE 18: FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," requires
disclosure of fair value information of financial instruments, whether or not
recognized in the consolidated statement of condition, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument.
Management uses its best judgment in estimating the fair value of the Company's
financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates herein are not necessarily indicative of the amounts the Company
could have realized in a sales transaction on the dates indicated. The
--------------------------------------------------------------------------------
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estimated fair value amounts have been measured as of their respective
year-ends, and have not been re-evaluated or updated for purposes of these
financial statements subsequent to those respective dates. As such, the
estimated fair values of these financial instruments subsequent to the
respective reporting dates may be different than the amounts reported at each
year-end.
The following information should not be interpreted as an estimate of the fair
value of the entire Company since a fair value calculation is only provided for
a limited portion of the Company's assets and liabilities. Due to a wide range
of valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Company's disclosures and those of other
companies may not be meaningful. The company, in estimating its fair value
disclosures for financial instruments, used the following methods and
assumptions:
CASH AND CASH EQUIVALENTS - the carrying amounts approximate fair value.
INVESTMENT SECURITIES - fair values of securities are based on quoted market
prices, where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments.
LOANS AND MORTGAGE LOANS HELD-FOR-SALE - for variable rate loans that reprice
frequently and with no significant credit risk, fair values approximate carrying
values. Fair values for fixed rate loans are estimated using discounted cash
flow analysis, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
FEDERAL HOME LOAN BANK STOCK - the carrying amounts reported approximate fair
value.
MORTGAGE SERVICING RIGHTS - the carrying amount approximates fair value.
ACCRUED INTEREST RECEIVABLE AND PAYABLE - the carrying amounts of accrued
interest receivable and payable approximate their fair values.
DEPOSIT LIABILITIES - The fair values disclosed for demand deposits (e.g.,
interest-bearing and noninterest-bearing checking, passbook savings and certain
types of money management accounts) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying amounts). Fair
values for fixed-rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
certificates of deposits to a schedule of aggregated expected monthly maturities
on time deposits.
BORROWINGS - the fair values for short-term borrowings and junior subordinated
debentures approximate the carrying amounts. The fair values for long-term
borrowings were estimated using discounted cash flow analysis based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements.
OFF-BALANCE SHEET INSTRUMENTS - Fair values for the Company's off-balance sheet
instruments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing.
--------------------------------------------------------------------------------
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The carrying amounts and fair values of the Company's financial instruments as
of December 31 are presented in the following table:
2005 2004
---------------------------------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(Dollars in thousands) AMOUNTS FAIR VALUES AMOUNTS FAIR VALUES
---------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash equivalents $ 7,895 $ 7,895 $ 14,325 $ 14,325
Investment securities 74,239 74,239 75,069 75,069
Mortgage loans held-for-sale - - 2,159 2,329
Net Loans 187,889 189,598 185,125 190,034
Federal Home Loan Bank Stock 1,805 1,805 1,768 1,768
Accrued interest receivable 1,678 1,678 1,505 1,505
Mortgage servicing rights 146 146 198 198
---------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Deposits $ 236,377 $ 236,552 $ 236,672 $ 237,410
Borrowed funds 31,360 33,883 35,360 36,360
Junior subordinated debentures 5,155 5,155 5,155 5,155
Accrued interest payable 161 161 143 143
---------------------------------------------------------------------------------------
OFF-BALANCE SHEET INSTRUMENTS:
Standby letter of credit $ - $ - $ - $ -
Commitments to extend credit - - - -
Forward rate lock commitments - - - -
=======================================================================================
NOTE 19: PARENT COMPANY - FINANCIAL INFORMATION
The following represents the condensed financial information of Pathfinder
Bancorp, Inc. for years ended December 31:
STATEMENTS OF CONDITION 2005 2004
-----------------------------------------------------------------------------
(In thousands)
ASSETS
Cash $ 245 $ 982
Investments 19 -
Receivable from bank subsidiary - 41
Investment in subsidiaries 24,602 25,698
Due from subsidiaries 1,125 240
Other assets 207 243
---------------------------------------------------------------------------
Total assets $26,198 $27,204
===========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued liabilities 115 223
Junior subordinated debentures 5,155 5,155
Shareholders' equity 20,928 21,826
---------------------------------------------------------------------------
Total liabilities and shareholders' equity $26,198 $27,204
===========================================================================
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STATEMENTS OF INCOME 2005 2004 2003
----------------------------------------------------------------------------------
(In thousands)
Interest income $ 14 $ 9 $ 16
Interest expense 352 259 243
----------------------------------------------------------------------------------
Net interest expense (338) (250) (227)
Operating expense (92) (130) (106)
Realized gain on sale of investment security - 330 104
Amortization of deferred financing costs (30) (30) (30)
----------------------------------------------------------------------------------
Loss before tax benefit and equity in
undistributed net income of subsidiaries (460) (80) (259)
----------------------------------------------------------------------------------
Tax benefit 128 20 73
----------------------------------------------------------------------------------
Loss before equity in undistributed net
income of subsidiaries (332) (60) (186)
Equity in undistributed net income of subsidiaries 794 1,465 1,837
----------------------------------------------------------------------------------
Net income $ 462 $ 1,405 $ 1,652
==================================================================================
STATEMENTS OF CASH FLOWS 2005 2004 2003
----------------------------------------------------------------------------------
(In thousands)
OPERATING ACTIVITIES
Net Income $ 462 $ 1,405 $ 1,652
Equity in undistributed earnings of subsidiaries (794) (1,465) (1,837)
Realized gain on sale of investment security - (330) (104)
ESOP shares earned 88 133 122
Amortization of deferred financing costs 30 30 30
Other operating activities (987) (304) 81
----------------------------------------------------------------------------------
Net cash used in operating activities (1,201) (531) (56)
----------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from loan to subsidiary 41 56 56
Dividends receivable 911 8 7
Purchase of investments (18) - -
Proceeds from sale of investments - 430 154
----------------------------------------------------------------------------------
Net cash provided by investing activities 934 494 217
----------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 213 140 35
Dividend received from subsidiary - - 1,500
Cash dividends (683) (664) (651)
Treasury stock purchased - - (2,687)
----------------------------------------------------------------------------------
Net used in financing activities (470) (524) (1,803)
----------------------------------------------------------------------------------
Decrease in cash and cash equivalents (737) (561) (1,643)
Cash and cash equivalents at beginning of year 982 1,543 3,186
----------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 245 $ 982 $ 1,543
==================================================================================
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ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A: CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including our Chief Executive Officer and Chief Financial Officer, the Company
has evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Exchange Act) as of the end of the period covered by this annual report. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. There has been no change in the
Company's internal control over financial reporting during the most recent
fiscal quarter that has materially affected, or is reasonable likely to
materially affect, the Company's internal control over financial reporting.
ITEM 9B: OTHER INFORMATION
None
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) Information concerning the directors of the Company is incorporated by
reference hereunder in the Company's Proxy Materials for the Annual Meeting
of Stockholders.
(b) Set forth below is information concerning the Executive Officers of
the Company at December 31, 2005
NAME AGE POSITIONS HELD WITH THE COMPANY
Thomas W. Schneider 44 President and Chief Executive Officer
James A. Dowd, CPA 38 Vice President, Chief Financial Officer
Edward A. Mervine 49 Vice President, General Counsel
John F. Devlin 41 Vice President, Senior Commercial Lender
Melissa A. Miller 48 Vice President, Chief Operating Officer
Rhonda Hutchis 47 Vice President, Retail Lending
--------------------------------------------------------------------------------
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ITEM 11: EXECUTIVE COMPENSATION
Information with respect to management compensation and transactions required
under this item is incorporated by reference hereunder in the Company's Proxy
Materials for the Annual Meeting of Stockholders under the caption
"Compensation".
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained under the sections captioned "Stock Ownership of
Management" is incorporated by reference to the Company's Proxy Materials for
its Annual Meeting of Stockholders.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the caption "Certain
Transactions" in the Definitive Proxy Materials for the Annual Meeting of
Stockholders and is incorporated herein by reference.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is set forth under the caption "Audit and
Related Fees" in the Definitive Proxy Materials for the Annual Meeting of
Stockholders and is incorporated herein by reference.
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Page 69
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements - The Company's consolidated financial
statements, for the years ended December 31, 2005, 2004 and 2003, together
with the Report of Independent Registered Public Accounting Firm are filed
as part of this Form 10-K report. See "Item 8: Financial Statements and
Supplementary Data." The supplemental financial information listed and
appearing hereafter should be read in conjunction with the financial
statements included in this report.
(a)(2) Financial Statement Schedules - All financial statement schedules
have been omitted as the required information is inapplicable or has been
included in "Item 7: Management Discussion and Analysis."
(b) Exhibits
3.1 Certificate of Incorporation of Pathfinder Bancorp, Inc. (Incorporated
herein by reference to the Company's Current Report on Form 8-K dated June
25, 2001)
3.2 Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein by reference
to the Company's Quarterly Report on Form 10Q dated August 15, 2005)
4 Form of Stock Certificate of Pathfinder Bancorp, Inc. (Incorporated
herein by reference to the Company's Current Report on Form 8-K dated June
25, 2001)
10.1 Form of Pathfinder Bank 1997 Stock Option Plan (Incorporated herein by
reference to the Company's S-8 file no. 333-53027)
10.2 Form of Pathfinder Bank 1997 Recognition and Retention Plan
(Incorporated by reference to the Company's S-8 file no. 333-53027)
10.3 2003 Executive Deferred Compensation Plan (Incorporated by herein by
reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2004 file no. 000-23601)
10.4 2003 Trustee Deferred Fee Plan (Incorporated by herein by reference to
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
2004 file no. 000-23601)
10.5 Employment Agreement between the Bank and Thomas W. Schneider,
President and Chief Executive Officer (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004
file no. 000-23601)
10.6 Employment Agreement between the Bank and Edward A. Mervine, Corporate
Counsel (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004 file no. 000-23601)
21 Subsidiaries of Company
23 Consent of Beard Miller Company LLP
31.1 Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive Officer
31.2 Rule 13a-14(a) / 15d-14(a) Certification of the Chief Financial Officer
32.1 Section 1350 Certification of the Chief Executive and Chief Financial
Officer
--------------------------------------------------------------------------------
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pathfinder Bancorp, Inc.
Date: March 30, 2006 By: /s/ Thomas W. Schneider
Thomas W. Schneider
President and Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: /s/ Janette Resnick
Janette Resnick, Chairman of the Board
Date: March 30, 2006
By: /s/ Thomas W. Schneider By:/s/ Chris R. Burritt
Thomas W. Schneider, President Chris R. Burritt, Director
and Chief Executive Officer
Date: March 30, 2006 Date: March 30, 2006
By: /s/ James A. Dowd By:/s/ George P. Joyce
James A. Dowd, Vice President, George P. Joyce, Director
Chief Financial Officer and
Trust Officer
Date: March 30, 2006 Date: March 30, 2006
By: /s/ Bruce E. Manwaring By:/s/ Corte J. Spencer
Bruce E. Manwaring, Director Corte J. Spencer, Director
Date: March 30, 2006 Date: March 30, 2006
By: /s/ L. William Nelson, Jr. By:/s/ Chris C. Gagas
L. William Nelson, Jr. Director Chris C. Gagas, Director
Date: March 30, 2006 Date: March 30, 2006
By: /s/ Steven W. Thomas By:/s/ Lloyd Stemple
Steven W. Thomas, Director Lloyd Stemple, Director
Date: March 30, 2006 Date: March 30, 2006
--------------------------------------------------------------------------------
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